Q: It's so hard to figure out what all these insurance terms really mean. Can someone please just explain the concept of term life insurance to me? What does "term life insurance" mean?
A: At the core of all life insurance is simple statistics. These statistics, summarized into what are known as mortality tables, predict how many people of a given gender, a given age, and within a given population will pass away in a given period of time (typically a year). These statistics allow life insurance companies to make predictions and set premiums for life insurance policies.
This year-to-year relationship between the likelihood of an individual dying and the premium they would pay for life insurance is term life insurance. Each year, as a person grows older, the higher the likelihood (statistically) they will die. Thus, each year a person grows older, the premium for the term life insurance policy will be higher, assuming the death benefit remains the same.
Many consumers today may be confused by this when they see offers from life insurance for multi-year term life policies. What they actually are being offered is a policy where the next 10 (or 20, depending upon the offer) years of term life insurance premiums are actually the real term insurance costs averaged over that time. The actual cost of insurance from the first year to the last year increases, but the increases are reflected in an average so the premium is level for the consumer.