On the radio you can hear what seem like endless advertisements for term life insurance. But do you know exactly what it is?

The first kind of insurance was term life insurance. Simply put, it pays a lump sum of money when and if the insured dies during the span of the policy. In most cases you pay only for the life insurance benefit and there is no accumulation of cash value during the term. Basically it represents a bet by the insurance company that the insured will live and not die. In a way you are betting that you will die. If you do die, you’re the winner. If you live, the Insurance Company keeps your premiums.

In spite of the fact that such a presentation of life insurance might be a bit ironic, it still plays a vital role in the personal financial planning of anybody. It is a form of risk management. What you are attempting to do is to make sure that your dependents are provided for if you die. It might only replace lost income but it can still include other elements such as education expenses, mortgage payments, as well as funeral expenses.

Term life insurance works well for most insurance companies because the odds are that a normal healthy person is at a little risk of dying during the term of the policy. This means that they usually win most of the bets. They use a medical examination before granting the insurance so high risk individuals are excluded up front. The term of the policy can be anywhere from 10 to 30 years in length.

If you choose to renew the term policy when it expires you will probably have to pay a higher premium since you are now older and at greater risk of dying. Premiums are calculated in different ways. There are policies where there is a guaranteed renewal and the premiums are averaged over the life of the term. This keeps the premiums constant but they will start at a bit high than other policies.

When determining risk management, the use of term life insurance is generally the less expensive option. This is because there is no buildup of cash value and no extra being added to the premium to provide for this. Most financial planners are not concerned by this. The way they see it, other opportunities will provide a better investment return. For this reason term insurance can be a good option when you need to protect your dependents from your untimely death.