A term life insurance policy is an insurance plan that provides life cover to a person only during the decided term period. The premium for the entire period is fixed and arrived at before the term life insurance policy and the cover commence. The cover dissolves if the person survives the term. The term for a term life insurance plan varies from anywhere between 5 years to 30 years. Being a conventional plan, the term life insurance policy is most suited to meet the needs of people who do not have sufficient resources to go in for a whole life insurance plan which demands larger premiums. Term life insurance policies are also an easy option to protect one’s family for a particular term, until a sufficient corpus can be arranged, that would take care of the beneficiaries in case of death of the insured.
No market investments are made for the insured and hence no returns are given in a term life insurance policy. It is purely a life cover plan. However, the money saved on premiums in a term life insurance policy can also be used by individuals to make investments of their own choice. Individuals may also choose to go in with a term life insurance policy to protect their family until say, their retirement, by which time they presume they will have built their own corpus to support their family post retirement.
Because the premiums are used only as a cover and there are no funds built that act as cushions, the policy lapses if premiums are not paid within the grace period. Primarily, premiums in a term life insurance policy are calculated based on the probability of the insured dying in the term period. However, because the premium remains constant throughout the term, the longer the term the higher is the premium. This is because the death probability is low during the initial years and increases during the later years of the term. The premium fixed in a term life insurance policy is averaged over the years.
The premium in a term life insurance policy is cheaper as compared to a whole life insurance policy because the chance of the insurance company paying a death claim is lesser in a term life insurance policy. However, in a whole life insurance policy, the company eventually ends up paying out a death claim.
Another kind of term life insurance policy is an annual policy where the company guarantees re-insurability for a given term, but the premium keeps increasing every year. As in any other insurance plan, a medical check-up is usually mandatory for the person to be insured, especially if the age of the person is on the higher side. On the whole, however, a term life insurance policy is always a cheaper option for people who wish to seek a life cover and decide their own investment plans.
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