Final answer:
Term life insurance is a life insurance that lasts for a specified 'term' or period, with three main types being Level Term (constant death benefit), Decreasing Term (death benefit decreases over time), and Increasing Term (death benefit increases over time).
Step-by-step explanation:
Term life insurance is a specific type of life insurance that provides coverage for a set period or 'term.' Upon the death of the insured individual within this period, it pays a benefit to their designated beneficiaries. There are three primary types of term life insurance policies that individuals can choose from, each designed to cater to different needs and circumstances. These types are Level Term, Decreasing Term, and Increasing Term insurance.
Level Term Life Insurance
Level Term Life Insurance is the most common type. In this policy, the death benefit remains constant throughout the duration of the policy. This predictability makes it a popular choice for individuals seeking a straightforward and reliable insurance option.
Decreasing Term Life Insurance
In a Decreasing Term Life Insurance policy, the death benefit diminishes over the policy term, typically in line with a mortgage or a debt that decreases over time. This type of policy is often used as a financial safety net specifically designed to cover outstanding debts that decrease over time.
Increasing Term Life Insurance
Increasing Term Life Insurance policies are designed with a death benefit that increases over the course of the policy term, usually to keep up with inflation or to accommodate changes in financial responsibilities. This type is less common but can be an attractive option for those expecting their future financial needs to grow over time.
Unlike cash-value (whole) life insurance, which combines a death benefit with a savings component, term life insurance is purely for death benefit protection without an investment aspect, thus providing coverage at a typically lower cost.