Term Life Insurance. What exactly is it?

"Lowest rates!" boasts one advertisement. "Protect your family's financial well-being!" advises another.

With all these catchy little lures, it can be difficult to evaluate whether term life insurance has a place in your personal insurance portfolio. It is more important to know exactly what you're buying before worrying about whose rates are the most competitive or their historical performance.

As with all life insurance policies, term life insurance pays a lump sum benefit to your designated beneficiary if you die before the policy ends.

The flexibility of term life insurance allows you to spend less for coverage at various stages in life, when the need for coverage may be higher. In these situations, term life insurance may be the most cost-effective, sensible option.

Young couples with large debt

A young adult starting a new career…newlyweds planning to purchase a new home…a couple thinking about having children….All are experiencing life stages in which money is tight, but life insurance becomes a necessity.

For example, Mike and Joni, both 29, were married recently and plan on having children within the next few years. The couple just purchased a home with a 30-year mortgage. Both work, but with a new home and children on the way, finding a life insurance policy that fits into their budget can be difficult.

After researching various life insurance plans available, Mike purchased a term life policy. This will protect Joni from incurring their mortgage debt or child's education expenses if he dies before the policy term ends.

An important factor Mike considered in his decision-making process was that he could buy a policy with a large benefit for a more affordable price than he could purchase with any other type of life insurance.

Individuals with short-term needs

Young couples are only one example of those who may wish to consider term life insurance. There are also individuals with short-term coverage needs, generally those lasting ten years or less.

A child leaving home for college or a start-up business in need of key person coverage is an example of a short-term need. These are situations in which term life coverage may be financially more advantageous to you than other available life insurance plans.

Older couple, less debt

Couples nearing retirement may also benefit more from term life insurance. Let's consider Brad and Rachel's life situation. Married and in good health, both are in their late 40s and have two children, ages 16 and 17. Their mortgage will be paid off soon and both plan to retire by the time they reach 60. In this situation, a term life policy would cover their mortgage, as well as their children's college education expenses if one of them dies before the policy ends.

Ending your policy—what then?

If you cancel your policy, your coverage ends with no cash payback. At that point, circumstances may warrant a need for whole life insurance. For instance, if Mike cancels his policy later on in life, he could convert his coverage to a whole life policy. By that time, it is probable he and his wife will be earning more and will want coverage to help them with estate planning needs. Unlike term life, whole life policies develop cash values and insure you for as long as you live. Many term life plans include a conversion option at the end of the policy that does not require a medical examination. To be sure your policy contains a conversion option, check the conversion privileges of the term policy.

How much do you need?

The amount of term life insurance needed varies from family to family. Some financial experts recommend you have a policy equal to at least five times your annual income, while others recommend as much as 10 times your income.

A young couple with a mortgage and small children probably need higher benefits, whereas a retired couple with a pension and no dependent children need lower benefit amounts.

As in the above examples, taking on more responsibility and debt increases your life insurance needs. Determining these needs depends on your current family situation. If you're a young family just starting out or a middle-aged parent preparing to send your children to college, term life insurance is an economical option you should consider.

There are several resources available if you're interested in learning more about term life insurance, and whether it's right for you and your loved ones. The American Society for Public Administration endorses a term life plan that offers many coverage options. In addition, the plan is flexible and adaptable to your needs.