term life insurance

Imagine you have young children and a mortgage. If you died tomorrow, your family would lose your income and might lose the house. You do not want to gamble lifelong savings on insurance — you just want a big safety net for the years your family is most dependent on you. Term life insurance is exactly that: a large death benefit for a limited, fixed window of time, at a low price.

You choose a term (say 20 years) and a benefit (say 500,000). You pay a premium, often level (the same every year). If you die during the 20 years, the insurer pays the 500,000 to your beneficiary. If you are still alive when the term ends, the policy simply expires and pays nothing — there is no savings account, no cash value, nothing returned. Because most policyholders survive the term, and because the contract holds no investment pot, the premium is small relative to the benefit. A healthy 35-year-old might insure 500,000 for under a few hundred a year.

In actuarial practice term life is the cleanest product to price: it is almost pure mortality risk plus expenses, with little investment element. The premium reflects the chance of dying each year (which rises with age), so on a yearly-renewable basis cost climbs steeply later in life; a level premium smooths this by overcharging in early years to subsidise the expensive later ones. The honest caveat for buyers: 'term insurance is cheap because it usually pays nothing' — that is the point, not a flaw. It buys protection, not a return.