Source: MSN BLOG

Term life insurance is life insurance that is set in a "term", meaning it only covers a specified period of time. Term life insurance is built on being the most cost effective form of insurance. However, this form of life insurance is purely a gamble since if it expires prior to the time of death than no money will be rewarded if the insurance provider and the purchaser of the life insurance do not come to a new deal. This is in contrast to other forms of permanent life insurance which, as it sounds, never expires.

Most term life insurance is sold in terms of one year. The insurance company would be required to pay the agreed upon amount if the insured passes away during that time period. If the insured does not and the time period expired, than the term life insurance must be purchased again for the next year, usually involving higher costs and lower benefits as time goes on. To offset the risk of not being able to renew the life insurance, usually "annual renewable term" is purchased with the term life insurance which guarantees that the life insurance can be renewed for a set number of years.

Since term life insurances are usually only given to healthy people, the likeliness of payout is very low with term life insurance. Studies have found that fewer than 1% of those who purchase term life insurance ever actually receive any form of payout. This is why term life insurance is priced so low and seems so appealing. It does indeed have the highest payout per dollar spent but insurance companies gamble on the fact that a healthy person rarely dies randomly within the following year. This is why many turn instead to permanent life insurance plans which, although they cost more, offer both tax refund benefits as well as much higher payout rates.

Term life insurance is definitely the cheapest method to seek when looking for life insurance, although it is not always the most advisable path to take. It has many benefits, the most glaring being its cost effectiveness, but it also has many drawbacks and other options should be heavily considered as well.