Term Life Insurance
Because term life insurance is a pure death benefit, its primary use is to provide for covering financial responsibilities of the insured. Such responsibilities may include, but are not limited to, consumer debt, dependent care, college education for dependents, funeral costs, and mortgages.
Term life insurance provides coverage for a limited period of time, the relevant term. After that period, the insured can either drop the policy or pay annually increasing premiums to continue the coverage. If the insured dies during the term, the death benefit will be paid to the beneficiary. Term insurance is often the most inexpensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis.
Term insurance functions in a manner similar to most other types of insurance in that it satisfies claims against what is insured if the premiums are up to date and the contract has not expired, and does not expect a return of Premium dollars if no claims are filed. As an example, auto insurance will satisfy claims against the insured in the event of an accident and a home owner policy will satisfy claims against the home if it is damaged or destroyed by, for example, an earthquake or fire. Whether or not these events will occur is uncertain, and if the policy holder discontinues coverage because he has sold the insured car or home the insurance company will not refund the premium. This is purely risk protection.
Level Term Life Insurance
The most common form of term life insurance is guaranteed level premium term life insurance, where the premium is guaranteed to be the same for a given period of years. The most common terms are 10, 15, 20, and 30 years. In this form, the premium paid each year is the same. The longer the term the premium is level for, the higher the premium, because the older, more expensive to insure years are averaged into the premium.
Most level term programs include a renewal option and allow the insured to renew for a maximum guaranteed rate if the insured period needs to be extended. Typically this clause is invoked only if the health of the insured deteriorates significantly during the term.
Return of Premium Life Insurance
Return of premium life insurance is a type of term life insurance policy. The concept is that the policy returns the premiums you have paid for coverage over that fixed term period if coverage is never used. For instance, a $1 million policy bought for $50,000 over a 30 year period would result in the $50,000 being refunded to the policyholder.
Critics point to the rate of return being less than in a typical investment, as well as the extra cost of the policy compared to basic term life insurance policies. Also, if the policy is cancelled at any time, no money is refunded. While this was the original concept, many current policies do allow prorated refunds at some point during the life of the policy.