Term life insurance policies work well for people who need life insurance protection for a limited time period, but who have limited funds with which to purchase coverage. For example, a young couple with a mortgage might decide to take out term life insurance policies to provide funds to pay off the mortgage, in the event one or both of them was to die prematurely. This can help ensure the survivor would be able to stay in the home without worrying about how to make monthly mortgage payments. Similarly, parents with young children may want to purchase term insurance on their own lives, to help provide funds to make up for the loss in household income that would occur if one of them died.

Fixed, low premium payments

Coverage for a pre-defined policy term

More insurance protection per dollar spent than permanent policies (at least with the initial policy term)

Ability to customize the policy by adding riders and variations. For example, some policies may include an optional rider giving the policyholder the right to convert the policy into permanent coverage at some point in the future. Other riders available on some term policies include accelerated benefits riders for those with terminal illnesses or waiver of premium benefits that can help someone keep a term policy in force even if the policyholder becomes disabled and isn’t able to continue making premium payments.

Another use for term life insurance in some circumstances is referred to as “collateral assignment” or simply “collateral insurance.” Here’s how it works:
When someone takes out a loan that isn’t secured by something else like a car or a house, the lender may require the borrower to provide some assurance that the loan will be paid back if the borrower dies while there is still an outstanding balance. That’s where term life insurance comes in. When a policy holder chooses to assign their life insurance to the lender, the lender will be paid from policy proceeds first if a death occurs during the term of the loan.

Term insurance can be an inexpensive way to provide collateral for a loan for a short period of time. While you will want to confirm tax consequences with a tax professional before choosing this approach, using a term insurance policy as collateral is generally a tax-neutral decision, because the IRS does not tax loans and insurance proceeds are generally tax-free to the recipient.

Sometimes, permanent insurance coverage best meets a customer’s needs; in other cases, those needs can be met through term insurance. It may make sense to combine term and permanent life insurance policies to protect what’s most important to you.