Term insurance is a specific type of policy applied to life insurance that only provides cover for a certain period of time, aka a term. If the policy holder dies during the time period of the term, then the policy will payout to the beneficiary. If however the term has passed then no money will be paid out. At the end of every term the policy holder has the opportunity to extend the contract or cancel it, and pick it up again later. This is often more cost effective than other forms of term life insurance that is continuous.
Like all forms of life insurance, the main purpose of term insurance is to cover costs associated with the death of an important earner in the family, so that the family does not fall in to hard financial times. Common reasons for life insurance include securing a mortgage, sending children through college, or to give a crossover period where another adult in the family can find a job to take care of the family.
Commonly, term insurance is taken out annually and renewed every year. The cost is determined on the likelihood of the policy holder dying in that year. Problems can occur when somebody develops a serious illness in one year, but doesn’t die, meaning the insurance company will be reluctant to renew for the following year. It is important to find a policy with a guaranteed renewal clause, so that you do not find yourself in this situation.
Term insurance is often taken out by those that cannot necessarily afford insurance all of the time and are willing to go a few years without insurance during financial trouble, picking it up later on down the line. Unfortunately it is sometimes the case that the policy holder dies just weeks after not renewing their policy, meaning nothing is paid out, despite paying premiums up until that point.