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What is a "term" in life insurance?


Defining the term

A term is a period of time during which your life insurance policy is active, or in force. Typical terms are 10, 20 or 30 years. A term can also go up to a specific age, such as 65.

Obligations during the term

During the term, you pay a fixed amount of money every month, or once a year. This fixed amount you pay is known as the premium. If the premium is paid, the life insurance policy is active. If the policy is active, the insurance company has a legal obligation to pay out a lump-sum and tax free payment, in case the individual insured, dies during the term of the policy.

Premiums paid during the term

In most cases, the premium remains the same throughout the entire term. For example, if you are quoted a premium of $30/month, and you choose a 10 year term, then you will pay the $30 throughout the entire duration of that term. Once the term ends, your coverage expires and you can stop paying premiums or choose to renew your policy.

Choosing the right term

There are several ways to choose the right term for your policy. The first question to ask yourself is what you want the life insurance policy to cover?

  1. Outstanding debt: If you want your policy to cover your outstanding, consider how long it will take for you to pay that debt off, and consider the appropriate term. For example, if you recently purchased a home, and took on a 20-year mortgage,  then you might consider purchasing a 20-year term life insurance policy.

  2. Income replacement: You may want your life insurance policy to replace your income, and to ensure your family’s financial stability, in case of your premature death. In that case, consider the age of your children. If you have young children, you may consider a longer term, such as 15 or 20 years. This will provide protection to your family, until your children are financially independent, and are less likely to need your support.