What is Term Life Insurance?

Term life insurance is both a risk management and income protection tool. Less expensive than permanent, universal or whole life insurance, term packages are only guaranteed during the length of a policy-usually 10, 20 or 30 years. Today, a popular investment strategy is to "buy term and invest the difference". Term life insurance is typically not used for estate planning or charitable giving; but instead, it's a safety net which provides coverage, in the event of an unexpected tragedy, for dependent care, mortgages, college education security, funeral costs and consumer debt.

How Term Life Insurance Works

There are several different types of term life insurance. The two most popular are annual renewable term (ART) and level term. Premiums are paid for one year coverage under an ART; however, the contract stipulates that the insured party is guaranteed renewal rights for a set amount of time-usually between 10 and 30 years. ART Premiums increase yearly. Level term is when a pre-determined premium is paid in equal amounts over a fixed period of time.

Financial Difference between Permanent and Term Life Insurance

Since term life insurance policies are for a pre-determined amount of time; therefore, they're less likely to be paid out than whole, permanent or universal life insurance contracts, which are always paid out. Since most people usually terminate their term insurance policies around retirement age, it's estimated that only 1% of packages result in a full payout. The low rate of pay-outs translates into lower premiums for term policies.

How "Buy Term and Invest the Difference" Works

"Buy term and invest the difference" is a common investment strategy. It works best for those still eligible for other tax-deferment programs, like IRAs and 401Ks. To establish a "buy term invest the difference" path, first find out how much a permanent life insure policy will cost. Next, purchase a lower-rate term policy; then, invest the difference between what you're paying in term premiums and what you would be paying for a permanent policy. By retirement age, the theory goes, you'll have enough saved to self-insure.

Term life insurance is an affordable, conservative investment that provides peace of mind for many.