Legal Definitions - term policy

A term policy is a type of life insurance contract that provides coverage for a specific, predetermined period of time, known as the "term." If the insured person passes away within this defined term, the policy pays a death benefit to the designated beneficiaries. Unlike other forms of life insurance, a term policy typically does not accumulate cash value over time and is designed purely for temporary financial protection.

Here are some examples to illustrate how a term policy works:

• Example 1: Family Financial Protection

  Maria and David recently purchased their first home with a 30-year mortgage and have two young children. To ensure their family would not lose the house or face severe financial hardship if one of them were to pass away prematurely, they decide to purchase a 25-year term life insurance policy for each of them. The policy amount is sufficient to cover their outstanding mortgage balance and provide for their children's education until they are adults. If either Maria or David dies within that 25-year period, the policy pays out, allowing the surviving spouse to manage the family's finances without the added burden of the mortgage or immediate income loss. After 25 years, if they are both still living, the policy simply expires, as their children will likely be independent and the mortgage significantly reduced or paid off.

• Example 2: Business Loan Coverage

  Sarah, the sole proprietor of a growing bakery, secured a significant five-year loan to expand her business and open a second location. To protect her business and her family from the burden of this debt should something happen to her, she takes out a five-year term life insurance policy for the exact amount of the loan. If Sarah were to die within those five years, the term policy would pay out, allowing the loan to be repaid without jeopardizing the future of her business or placing a financial strain on her heirs. Once the five-year term ends and the loan is repaid, the policy expires, having served its specific purpose.

• Example 3: Bridging a Temporary Financial Gap

  Mark, a recent medical school graduate, has accumulated substantial student loan debt. He plans to pay off these loans aggressively over the next ten years as he establishes his career. To ensure his parents, who co-signed some of his loans, would not be responsible for the debt if he were to die unexpectedly, Mark purchases a ten-year term life insurance policy. The policy's death benefit is set to cover his outstanding student loan balance. This provides him and his parents peace of mind for the specific period during which the debt is most significant. After ten years, once his loans are paid off, the policy will expire, as the temporary financial risk it was designed to cover will no longer exist.