Term Life insurance is life insurance that an insured would pay a certain premium amount for a certain death benefit for a specific length of time (the term of the policy) and the policy would end. Term Life insurance was originally designed as a year-to-year plan or Annual Renewable Term (ART). With ART, the insured would experience an increase in premiums each year because he/she is a year older and closer to mortality. Insurance companies discovered that it was hard to get people to renew each year because of the increases in the premiums. Term Life insurance now is designed with specific terms such as 10, 20 or 30 years in an effort to allow insureds the ability to stay insured without the constant threat of increases in premiums. Term Insurance is the purest form of Life Insurance you can buy today. It has no frills, you pay so much, for so long and if you die while the policy is in place your beneficiary is paid the specified death benefit.
A different form of Term Life insurance, Mortgage Insurance, was designed specifically to guarantee that a persons Home Mortgage would be paid off in the event the homeowner died before the mortgage was paid in full. This type of Term Insurance is also a form of ART, however the premium stays the same each year at renewal and the death benefit reduces each year to coincide with the remaining balance on the mortgage. This can be used as an Estate Planning tool to ensure that a widow isn’t put in a position of losing her house if her breadwinning husband should die prematurely, the house would be paid off at his death.
Term Life insurance has the lowest premium/death benefit ratio because it doesn’t build a cash value to allow for life-long premium payments.