What Is Term Life Insurance?

Term life insurance is an affordable type of life insurance policy that extends coverage for a specific period of time or “term” before expiring. It provides guaranteed coverage for the policy beneficiaries if the policyholder dies during the term.

This guide educates you about the ins and outs of term life insurance. Read on to learn what you need to know about how this type of insurance works, including who should get it and how to get coverage.

For a deeper dive into life insurance companies and what they offer, check out our best life insurance guide.

Table of contents

• What is term life insurance?
• How does term life insurance work?
• How to buy term life insurance?
• Summary of Money’s Guide to Term Life Insurance

 

What is term life insurance?

There are two key variables in a term life insurance policy: The amount of the death benefit and the length of the policy term.

If you die during the term of the policy, your beneficiaries will receive a death benefit or the “face value” of the policy.

While a 20-year term is most common, you can get term life policies that range from five to 30 years. Some insurers sell policies with a one-year term that reset after each year; these are called yearly-renewable term policies.

Types of term life insurance

If you’re shopping for life insurance, you should understand the four different kinds of term life insurance. These are called level term, decreasing term, renewable term and convertible term policies.

Level term life insurance

The key feature of level term insurance is that the monthly premium payments and the death benefit amount are fixed for the life of the term. For instance, a 40-year-old man with a clean medical history might pay roughly $18 a month for a 15-year level term policy with a $250,000 death benefit.

A variation of standard level term insurance is called level premium insurance. These policies have fixed monthly premiums but the face amount of coverage increases over the course of the term.

Decreasing term life insurance

Decreasing term life insurance can help you make sure that your family’s home would be protected in the event of your death. This policy type is characterized by fixed monthly premiums and a death benefit that gradually falls in value over the course of the term, and eventually reaches zero at the end of it.

These policies are often purchased by people who have a financial commitment with a decreasing balance, such as a mortgage. They are typically cheaper to purchase than level term policies because the payout amount decreases throughout the policy timeline.

Renewable term life insurance

The key feature of a renewable term policy is the ability to extend coverage annually without having to see a doctor. If you have a checkered medical record or a family history of serious health conditions, a renewable policy might be your best way to obtain and maintain life insurance coverage.

The drawback of renewable term coverage is that premiums are recalculated annually and generally go up over time as you grow older.

Convertible term life insurance

Convertible term life insurance is characterized by the option for the policyholder to turn their term policy into a whole or universal life insurance policy at the end of the policy term. This flexibility comes at a cost, however. Premiums for convertible policies are more expensive than for level policies with comparable coverage levels.

Learn more here about converting your term policy to whole life if this sounds like an option that would suit your need for financial protection.

What is group term life insurance?

Many people are eligible to receive term insurance through work. Under such group plans, the employer may offer a certain amount of coverage — typically $75,000 or less — at no charge to the employee, as a work benefit. Additional coverage is available to the employee at extra charge.

An advantage to group plans is that they generally require no medical exams or questionnaires, which can make them suitable for those who may not otherwise qualify for life insurance due to health issues.

However, for those who can qualify for policies that have medical requirements, the premiums they’ll pay for coverage above the amount offered by the employer at no charge may be higher than other options on the open market.  In addition, check the portability of your group coverage; in some cases, the policy ends when you leave the employer that sponsored it.

Is no-exam term life insurance available?

Simplified issue insurance is a form of term life insurance that doesn’t require an upfront medical exam. The ideal candidate for a simplified issue policy is a young person in excellent health with short-term life insurance needs.

This policy type has a short turnaround time for approvals, and applicants can be approved after answering a series of questions about their health background. A no-exam life insurance option such as a simplified issue policy may be more expensive and have lower limits because the absence of medical underwriting increases the risk incurred by the insurer.

 

Term life insurance eligibility

The first step in buying a new policy is establishing eligibility. When you apply for coverage, the insurance company or broker is likely to ask you for information like your:

• Age
• Height
• Gender
• Employer info and profession (to determine if you have a high-risk job)
• Individual and family medical history
• Lifestyle (including use of alcohol and tobacco as well as risky hobbies such as extreme sports)

As a policyholder, if you become terminally ill or develop a serious chronic condition, you likely will be unable to increase your policy’s coverage amount unless you had already purchased a guaranteed insurability rider.

Likewise, you can expect greater challenges obtaining a term life insurance policy if you are of advanced age — and be prepared to pay more for coverage. If you are shopping for life insurance and are older than 65 years old, consider looking into life insurance specifically for senior citizens. Read more about these options on our guide to the best life insurance for seniors.

What’s the difference between term and whole life insurance?

Term insurance protects you for a certain period, generally between 10 and 30 years, after which its coverage elapses — as does the need to pay its premiums.  Whole life insurance is a type of permanent life insurance — the most common, in fact. As that term implies, such policies never expire. Rather, they last as long as you live, and provide not only a death benefit but — eventually — a cash value on top of that benefit.

There’s a cost to that additional cash component, and to the greater risk the insurer carries by covering you for your entire lifespan, rather than only a portion of it. Permanent policies, including whole life policies, cost more per month than term policies with comparable death benefits, and often dramatically more.

These are the main differences between a term life policy and a whole life policy:

Term Life Insurance	Whole Life Insurance
Includes a guaranteed death benefit but no cash value; has an expiration date	Includes death benefit along with a cash value component for savings or investment
Death benefit is income tax-free for beneficiaries	Death benefit is not taxed, while investment portion is only tax-deferred
Expiration maximum of 30 years or age of policyholder	Policies in good standing do not expire
Lower premiums without cash value	Higher premiums offset by cash value that can supplement retirement income or pay for premiums
Policy renewals can trigger premium increases	Fixed premium amounts

For more information on the differences between term and whole life, read our guide on Term vs. Whole Life Insurance.

Term insurance duration of coverage

Term life policies are cheaper than permanent life insurance policies because they are in effect for a set number of years rather than the duration of your entire life. This limitation makes term life a much more affordable insurance option for people who need coverage most urgently for a particular time frame, such as until their mortgage is paid off or their children’s education has been completed.

Premiums are charged monthly and generally fixed, with the exception of renewable policies. Most policies have the option of renewing or letting the coverage lapse once the life insurance term ends.

Rates vary widely depending on the amount of coverage you want to purchase as well as the length of the term. The other key factors are your age and health profile — older people and those with a personal or family history of medical issues can expect to pay more.

A policy with $500,000 worth of coverage would cost the average customer about $20 per month for a 10-year term. This climbs to about $30 per month for a 20-year term and about $45 for a 30-year term.

How does term life insurance work?

You can think of a term life insurance policy as a safety net with an expiration date. You are buying peace of mind and the promise of financial security for your loved ones for the duration of your policy term.

The insurance company will pay out to your beneficiaries the death benefit stipulated in your policy if you die within the term your policy is in effect. If you outlive the term, though, the policy terminates and the insurer will not pay out the death benefit.

How much does term life insurance cost?

Premiums for term life insurance are cheaper than those for permanent life, since term coverage is for a fixed and limited duration. Permanent life policies such as whole life insurance and universal life insurance are more expensive because the coverage lasts as long as you live.

A 25-year-old male nonsmoker might expect to pay around $20 a month for a 20-year term policy with a $250,000 death benefit. The same policy would cost a woman of the same age about $15 a month.

Insurers use medical underwriting to build your risk profile — in other words, how likely you are to die during the term when your policy is in effect. This assessment process is used to determine how much an insurer will charge you for a term life policy. You can expect your insurance carrier to examine the following:

• Health history and medical profile
• Lifestyle risks such as hobbies
• Employment and occupation
• Financial stability and income
• Factors such as foreign travel, military service, criminal record and other life events that may impact your longevity

How can you lower your premiums?

Your age and health are the two most important determinants used by life insurance companies to calculate your premiums. Younger people, as well as those with a clean bill of health and no preexisting or chronic conditions, are eligible for the lowest premiums because they qualify as the lowest-risk customers.

Older life insurance shoppers as well as those in poor health can expect to pay higher premiums.

There’s nothing you can do about your age, obviously. But several other  factors insurers consider to calculate your premium are within your control.

Change the way you live

A risky lifestyle can put your health and life in jeopardy, which makes you more expensive to insure. Habits such as using cigarettes or other tobacco products, for instance, will increase your life insurance costs. Conversely, avoiding or stopping risky behaviors can help lower your premiums.

Many insurance companies now offer life insurance fitness rewards or incentives for people to pursue a healthy lifestyle. Rewards may include premium discounts for physical fitness along with healthy diet and exercise habits.

Adjust the value and duration of coverage

As the amount of your death benefit or the duration of your policy increases, so will your premiums.

To lower your premiums, calculate what your dependents would need in the event of your death and don’t buy excessive coverage above and beyond those requirements.

Limit the policy extras you buy

Insurance policy endorsements — also called riders — let you add extra benefits onto standard coverage, for a price. Riders can expand a policy’s utility by letting you, for instance, access death benefit money if you are still alive but develop a terminal illness, or convert your term life policy into permanent life insurance before the term expires.

This flexibility doesn’t come cheap, though: riders can raise your premiums by 10% to 30% more than what you would pay for standard coverage. Keep your costs lower by skipping riders you don’t need.

Some riders, such as a guaranteed insurability rider, may be offered on term policies even if they make little sense for the insurance product type and would be unlikely to be useful. Make sure you understand how any given rider could enhance your specific policy.

The Insurance Information Institute suggests policyholders consider protection that will pay your premium in the event that you become disabled, which is called a waiver of premium rider. Another common rider is a “return of premium” that will reimburse you the amount of money you’ve paid in premiums once the term of your policy has ended.

What can cause a claim denial?

It might seem an article of faith that the death of the policyholder will trigger a payout for the policy’s beneficiaries. However, there are some conditions under which a life insurance company might elect to dispute or deny a claim and not pay out a policy’s death benefit.

These circumstances most typically include:

• The insured person’s failure to disclose a medical condition or otherwise withhold relevant medical information during the underwriting process
• Self-inflicted death that occurs in the first two years of the policy term
• Coverage lapsing due to nonpayment of premiums
• Death inflicted by a policy’s beneficiaries
• Death that occurs during or as a result of criminal activity

What happens if you outlive the term of your policy?

With few exceptions, your policy simply terminates at the end of the term. Your insurer will advise you of the policy expiration and you stop making premium payments.

The exceptions to this course of events are:

• If you had a term insurance product with a rider for a “return of premium,” your insurance company will send you a check reimbursing you for the premiums you paid over the course of the policy term.
• If you opted for a conversion rider on your policy, you will have the option to convert that term life policy into a permanent policy — provided you do so before the original policy terminates.

How soon can beneficiaries expect to receive a death benefit?

After a policyholder dies, beneficiaries should notify the insurance company as soon as possible.

Insurance companies have up to 30 days in most states to review the claim and respond with an approval, a denial or a request for more information.

As a result, beneficiaries might have to pay out of pocket for funeral costs until the claim is approved.

Who can be a life insurance beneficiary?

You can choose anyone — or a list of people — to benefit from your life insurance policy. If, however, you make a minor a beneficiary, you may want to name an adult to manage the benefit on the child’s behalf until they reach a certain age.

You’re also free to choose more than one beneficiary, although in doing so you will need to stipulate how the death benefit will be distributed among them.

If and when your life changes, you can change the beneficiary or beneficiaries as well.

How to buy term life insurance

To start, determine the length of the term and the amount of coverage you want your policy to provide to your beneficiaries.

A 20-year term is the most common duration for term life policies, but you should choose a length of time that meets the financial needs of your loved ones. Determine for how long they will need financial protection if you were to die unexpectedly. Consider events like when your mortgage will be paid off or when your children will have completed their education.

The Insurance Information Institute recommends taking the following steps to determine how much life insurance coverage you need:

Determine how much insurance you need

Tally up what your dependents would need in order to replace your income and pay off any debts — including personal and business debts, as well as mortgages or other loans for which your home is the collateral.

Then consider the earnings your family would lose if you were to die. Many people buy term life insurance as a form of income replacement in the event of the policyholder’s untimely death. If you plan to do this, calculate the total amount over the years that your dependents would need to cover everyday living expenses as well as other financial obligations and debt service.

Other factors to include in your calculations are:

• Credit card debts and other outstanding financial obligations
• Funeral and burial costs
• Costs to replace employer-provided benefits such as health insurance
• Replacement costs to provide any services you provided for your family such as childcare

To avoid paying for more life insurance than you need, consider other sources of income apart from your earnings that your loved ones might be able to access after your death, such as Social Security payments, survivor pension benefits and so on.

Multiply that annual income figure by the number of years you would expect your beneficiaries to receive that financial support if you were to remain alive.

Experts recommend comparing at least three comparable quotes — for the same type and level of coverage — from different insurance companies before purchasing coverage. This will help you find the most affordable life insurance options.

Depending on the company you choose, you might find that you have the option of buying a policy over the phone or online — or you may need to use one method or the other, depending on the carrier or broker with which you choose to work.

 

Term life insurance pros and cons

Choosing the right insurer

The best life insurance company is a determination that depends on your particular policy needs and budget. The following steps will help narrow down the possibilities:

• Seek out carriers highly-rated for financial strength
• Obtain comparable quotes from at least three providers
• Compare final-offer rates after underwriting process has taken place
• Read the fine print of the quotes you receive as well as the details of the policies on your short list, and ask any questions before making a purchase

For guidance and tips to help you choose a provider that will suit your needs, see our list of the best life insurance companies.

Your best bet for advice about term life insurance coverage is a fee-only — that is, not a commission-based — financial planner. Insurance agents and brokers can be good sources for initial information and an introduction to policy types, but most of these professionals are paid based on commission, which might unduly influence any advice they might give you about selecting a company and policy type.

A qualified financial advisor can help guide you towards the amount and duration of term life coverage that will be the best fit for your financial situation, your budget and your family’s peace of mind.

Summary of Money’s guide to term life insurance

• A term life policy is a straightforward, accessible and affordable type of life insurance.
• Term life coverage is a good option for people with dependents facing a temporary need for income replacement and financial peace of mind.
• These policies pay out a death benefit in the amount you choose if you die within the duration of the policy term. A 20-year term is most common, but you can buy term life insurance with terms ranging from one to 30 years.
• Many insurers offer term life policies that can be converted to permanent life coverage if the conversion takes place before the original policy term expires.
• Term life insurance pays out a guaranteed amount and is more affordable than permanent life coverage.

See our list of best life insurance companies to learn about which life insurance providers we recommend and why, along with how to get life insurance quotes from them.