Providing for your loved ones after your death is a kind thing to do. That’s why term life insurance exists—but what is it, and should you choose it? Here’s how term life insurance works, and how to determine whether it’s the right financial decision for your situation.

What is term life insurance?

Term life insurance is also referred to as “pure life insurance.” It’s a type of life insurance where the beneficiaries receive a specific death benefit, if the policy holder dies within a specific term. There are no savings benefits associated with this type of policy—once the policy is over, there is no money paid out unless the policy holder dies within the term. If the term expires, the policy holder can either renew the contract, convert it to a permanent life insurance policy or let it lapse. Most policies last for terms of 10, 15 or 20 years.

Obviously, if the policy holder lets the life insurance lapse and then they die, their beneficiaries will receive nothing. If that’s a cause of concern to you, you should either keep renewing your policy or find something better suited to your individual needs.

How does term life insurance work?

When you sign up for a term life insurance policy, you’ll choose a payout amount. The insurance company will evaluate your risk factors (age, health and gender, although they may also require a medical exam) and determine how much your premiums should be. Factors like family history, your driving history, whether you’re a smoker and your occupation may also be taken into account.

If you die during the term, your beneficiaries receive the amount on the policy. It’s usually non-taxable, and can pay for important things like funeral costs, medical debt and other end-of-life expenses, plus give your loved ones a chance to get back on their feet. However, if the policy lapses, they will get nothing.

If you renew the policy, the premiums are recalculated based on the factors above. That means you’ll potentially pay more for the same terms. You may also be able to convert your policy into a whole life insurance policy, depending on the company with which you work.

Is term life insurance right for you?

Term life insurance is often a good idea for relatively young individuals. Healthy people under 40 can often get a term life insurance policy for $20 to $30 per month, over a 20-year term. That’s not a lot of money to pay, especially if you have a family depending on you.

However, if you’re older, term life insurance might not be the right solution for your needs. Whole life insurance may be more appropriate—but the premiums can cost hundreds of dollars per month, depending on risk factors.

When you need to figure out how to provide for your loved ones after your death, let the team at Safe Path Financial help. Call us today to decide whether term life insurance is a good solution for your situation.