How Does Term Life Insurance Work?


How Does Term Life Insurance Work?

When you apply for a term life insurance policy, you’ll choose the term (how long the policy will last) and the death benefit (how much your family will receive if you die). Those factors, along with your age and health status, will determine your premium. Your premium is the amount you’ll pay at regular intervals to maintain coverage. 

There are two types of term life insurance: level term and decreasing term. Level term, which is the most common type, means that the death benefit stays constant for the duration of the policy. With decreasing term life insurance, the death benefit drops at fixed intervals over the course of the policy.

In an ideal world, the beneficiaries would probably prefer that their loved one does not pass away. But like any type of insurance, term life insurance is meant to provide a financial safety net in the case of unexpected events. By paying your life insurance premium now, you’re giving your beneficiaries peace of mind that, should you die prematurely, they will be financially supported. 

“You pay a premium every year and that premium basically allows you to transfer the risk of a premature death to an insurance company,” says Jill Schlesinger, a Certified Financial Planner and business analyst for CBS News. If you outlive that term, you won’t get your premiums back, nor will your family receive a death benefit.  But you can choose to extend the term at that point, let it expire, or convert it to permanent life insurance. 

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