Is term life insurance worth it?

Term life insurance is affordable and straightforward. That's why it's the right choice for most life insurance shoppers.

Colin Lalley 1600

Colin Lalley

Published September 25, 2019

KEY TAKEAWAYS

  • Term life insurance provides financial protection for your family in the form of a death benefit

  • It's the most affordable form of life insurance

  • Term life expires after a set number of years, when the "term" has ended

Term life insurance lasts for a set number of years (the term) before it expires and you’re no longer covered.

Why do you want a life insurance policy that runs out? Because you may not need that financial protection anymore, and you don’t want to pay for an unnecessary insurance policy.

That’s why term life insurance is worth it for a majority of shoppers. Learn more about why you should consider a term life policy and who it’s right for.

In this article:

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What exactly is term life insurance?

Life insurance is a good idea when you have a lot of financial obligations – i.e. kids, a mortgage, and other debt. Policygenius makes it easy to compare term life insurance policies to find one that covers all your needs. Term life insurance is particularly worth it because it’s the most affordable type of life insurance available that provides a tax-free lump sum of money for a financial safety net.

There are three components of term life insurance policy that you should know:

  1. The death benefit is a lump sum of cash paid out by the life insurance company when you die. If you’ve ever heard someone say, “I took out a one million dollar life insurance policy,” that one million dollars is the death benefit.
  2. The beneficiary is the person or organization that will receive the death benefit. The beneficiary doesn’t need to be a family member or even a human being—it can be a trust fund, or a non-profit organization, or a business partner. You can have multiple beneficiaries who split the death benefit, and you should always have a backup beneficiary in case the primary beneficiary isn’t able to accept the death benefit for some reason. Learn more about life insurance beneficiaries.
  3. The term is how long the policy is active for. It’s called “term” because the policy lasts a set amount of time and then expires, after which you will no longer be covered by it. You’ll have to buy a new policy or renew the old one before it expires if you want to remain covered after the initial term.

How much does term life insurance cost?

Term life insurance is the most cost-effect form of life insurance for the coverage you get. Other types, like whole life, can cost 6-10 times more than term life for a similar benefit amount.

Here are sample costs for a 20-year, $500,000 term life policy at different ages:

AgeMonthly Premium
25$27.57
35$31.02
45$61.21

As you can see, life insurance gets more expensive as you get older, which is why it’s important to shop early and lock in lower rates.

Need help figuring how much a term life policy will cost you? Check our our free life insurance calculator.

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Pros and cons of term life insurance

What’s good about term life insurance?

  • It provides a lump sum of cash that can be used for pretty much anything. That includes burial expenses, college tuition for your children, living expenses for your spouse, mortgage payments, other outstanding debt, a donation to a favorite charity, and so on. It’s typically issued tax free.
  • It’s an easy-to-understand insurance product. This might not sound like that big of a deal, but once you take a look at all the varieties of permanent life insurance, you’ll appreciate how straightforward term life is.
  • It’s much cheaper than any type of permanent life insurance. The older you get the more any insurance is going to cost. But if you buy term life when you’re young and healthy the monthly premium can cost as little as $30-40.
  • You only pay for the coverage you need. Term insurance expiring is a good thing, because it means you have coverage when you have expenses but aren’t paying for it when you no longer have a mortgage or dependents.

What’s bad about term life insurance?

  • It ends at a predetermined point in the future. Some people consider this a bad thing. Let’s imagine you buy a 20-year term policy when you’re 30. When you turn 50 and it ends you will no longer be covered. You can of course buy a new one but it will be more expensive because of your age and health. You can avoid this buy talking to an expert and getting the proper coverage amount.
  • There’s no cash value. Permanent life insurance can often be cashed in for some amount of money. While this isn’t as robust as a dedicated investment vehicle, some people like the forced savings aspect of permanent life insurance, which term doesn’t have. This is how term is both cheaper and less complicated than permanent insurance, and the additional cost of permanent life insurance isn’t worth it for most people.

What alternatives are there to term life insurance?

Term life insurance is considered the simple, straightforward flavor of life insurance. There are no complicated rules or investment components - which is good, because life insurance isn’t a good investment.

The alternative to term is permanent life insurance, which can cover you for your entire lifespan so long as you keep paying the premiums. But there are two things to keep in mind with permanent life insurance:

Which is better, term or whole life insurance?

Term life insurance will be a better choice than whole life for most people. Whole life isn’t ideal because it’s more expensive and more complicated.

  • Whole life much more expensive than term. All of that complication and longevity comes at a price, so you’ll spend far more on a permanent policy to get the same amount of death benefit as you would on a term policy.
  • It’s more complicated, partly because there’s usually an investment component mixed in with the death benefit, and partly because it can come in a variety of forms; there’s whole life, variable life, universal life, and variable universal life (yes, seriously). This doesn’t necessarily make it bad, but it makes it complicated, and therefore easy to misunderstand, which in turn means it can be easy to buy the wrong policy or to spend more than you need to for adequate coverage.

The other alternative is to self-insure, which means you’ve accumulated enough wealth to personally provide financial support to your dependents (or spouse, siblings, etc.) after your death.

In an ideal world self-insurance is the best because there’s no insurance to buy at all, but for most people it’s not a realistic alternative before your mid-50s at least—after you’ve built up some savings, sent the kids off to school, paid off your mortgage, hit your peak salary, etc.

Basic Term LifeBasic Whole LifeUniversal LifeVariable LifeVariable Universal
Duration1-30 yearsLifeLifeLifeLife
Guaranteed Death Benefit?YesYesYesYesYes
Guaranteed Cash Value*NoYesProtected from risk, but can be depleted to pay premiumsNoNo
How Cash Value Grows (or Shrinks)N/AEarns interest at a predetermined fixed rateVariable rate determined by the insurerSubaccounts - pool of investor funds offered by the insurerSubaccounts - pool of investor funds offered by the insurer
PremiumsCan increase periodically OR be guaranteed level for the duration of the policyLevelVaries, up to the customer (subject to federal tax laws)LevelVaries, up to the customer (subject to federal tax laws)
NotesNo risk of losing coverage, but no cash value when term endsNo risk compared to other permanent types, but you can probably find better investment options elsewhereN/ARisk of ending up with expensive insurance policy with little to no cash valueRisk of ending up with expensive insurance policy with little to no cash value

*All permanent policies can be surrendered for their current cash value after a certain number of years, at which point the insurer will pay the accumulated cash value minus any loans and fees.

Learn more about the different types of life insurance.

Is term life insurance worth it?

If you have anyone who is financially dependent upon you, and you don’t have enough money set aside to provide for their financial needs should you die tomorrow, then life insurance is absolutely worth it. It should be your top insurance priority. And since term is cheaper and simpler than permanent, it’s easier to fit it into both your present-day budget and your long-term financial strategy.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.