Term Life Insurance

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Understanding term life insurance

Term life insurance is a form of life insurance that lasts for a set number of years — known as the term — before expiring. If you die before the term is up, your beneficiary — usually your family — receives a death benefit as a tax-free lump sum of money that can be used for funeral expenses, to pay bills, or for any other use.

Unlike whole life insurance and other forms of permanent life insurance, term policies don’t come with a tax-deferred savings component called the cash value. The cash value of a permanent life insurance policy accrues interest and can be used by the policyholder while they are still alive, while also usually making the life insurance policy costlier.

Due to its simplicity and affordability, purchasing term life insurance is one of the most popular ways to create a financial safety net. However, other types of life insurance can be a better fit for individuals with specific circumstances, such as lifelong dependents or a high net worth. Speaking to a life insurance adviser is the best way to determine what type of policy is the best fit for you.

In this article:

How term life insurance works

Term life insurance is very straightforward. There are only a few things you need to know to get started in understanding it.

TERM LIFE FEATURES
Average Duration10-30 Years
Average Cost$25-35/month
Guaranteed Death Benefit?Yes
Cash Value?No

Understanding the term

The primary element of term life insurance that sets it apart from other types of life insurance is the term – how long the policy is in effect.

Term periods usually last anywhere from 10 to 30 years, and you pay a monthly or annual premium during this time to keep the policy active. Once the term is up, you no longer pay the premiums and the policy expires.

Depending on the type of term life insurance you have, the premiums can:

  • Stay the same for the entire length of the policy
  • Increase over time
  • Decrease over time in rare cases

What happens if term life insurance expires?

The purpose of life insurance is to protect your loved ones from financial obligations if you’re not around to provide for them.

When you’re still saving for retirement, paying off a mortgage, or raising children and planning on sending them to college, life insurance makes sense. But eventually you’ll have saved for retirement through a 401(k) or IRA, you’ll have paid off your mortgage, and your kids will be out of the house with families of their own.

So why pay for life insurance when there are few – or no – financial obligations to account for?

The fact that term life insurance expires, and there are no additional fees associated with it, is what makes it the most affordable life insurance option. Don’t fret that your life insurance policy expires: that should be part of the plan.

What happens if I outlive my term life insurance policy?

If you outlive your term life policy, the policy expires and you are no longer covered. You have several options after that:

  • If you still need life insurance coverage, you can purchase a new term life policy (at a higher cost than the original policy).
  • If you still need life insurance coverage, you can convert your policy into a whole life policy.
  • If you had a return of premium policy, the premiums you paid over the policy term will be refunded to you. See below for more on return-of-premium life insurance.

Understanding the death benefit

If you die while your life insurance policy is still in force, your beneficiaries receive a tax-free lump sum called the death benefit which can be paid out all at once or over the course of their lifetime.

How much does term life insurance cost?

Since term life insurance protects your family for a set period of time while they’re still depending on your income and not for your entire life, term life insurance rates are much cheaper and offer more affordable financial protection than permanent policies like whole life.

AGE$250,000$500,000$750,000$1,000,000
25$17.48$27.66$38.87$46.15
35$19.05$30.67$43.30$52.16
45$35.54$60.88$88.70$113.03
55$85.75$153.96$225.24$289.64

Methodology: Sample monthly premium rates based on 20-year term life insurance policy for a non-smoker male in Preferred health rating; quotes based on policies offered by Policygenius in 2020.

In general, life insurance costs are determined by:

  • Health. The more likely you are to die while the policy is in force, the more expensive the policy will be. For this reason, unhealthy people, people with a family history of conditions like diabetes or cancer, and those who engage in risky work or hobbies are charged more.
  • Age. Similarly, older applicants will pay more than younger shoppers. Life insurance costs increase at a rate of 8-10% a year.
  • Coverage amount. The larger the death benefit amount, the more you’ll pay for the policy.
  • Term length. The longer the policy is in force, the more expensive it’ll be.
  • Riders. Adding certain riders to change the stipulations or parameters of a policy may make it more expensive.

➡ Learn more about how life insurance costs are determined.

Because age is one of the major deciding factors in a life insurance policy’s cost, it’s important to know how term life insurance rates increase by age when you’re deciding when to buy and what type of coverage you should get.

How much term life insurance do I need?

Besides health and age, you need to take into account the amount of coverage a term policy provides to determine the final cost. You want to keep the policy affordable (there’s no point in having a policy that you won’t be able to pay for) while still making sure your family will be able to cover their financial needs.

When deciding how much term life insurance you need, you should take into account:

  • Outstanding debt, like a mortgage
  • Future college costs
  • Dependents, including children and aging parents
  • End-of-life expenses for yourself
  • Any financial cushion your family might need

In general, your term life policy should last as long as your longest debt (usually a mortgage) and should cover any remaining costs when you subtract your debts from your existing assets.

➡ Learn more about how to decide how much life insurance you need.

Of course, you don’t need to crunch all the numbers by hand. You can use our free life insurance calculator to get a tailored recommendation for the term length and coverage amount we think you should have.

Pros & cons of term life insurance

Wondering if term life insurance is right for you? Consider the potential pros and cons:

ProsCons
Cheapest life insurance optionCoverage doesn’t last your entire life
Lasts for a set period of time so you aren’t paying for coverage you don’t needDoesn’t provide a cash-value component
Provides enough financial assistance to pay off debts, cover future costs, and provide a financial safety net

➡ Learn more about if term life insurance is worth it.

Term vs whole life insurance

Most insurance shoppers will need to decide between buying term life insurance or whole life insurance.

The main differences in term life insurance vs whole life insurance are:

  • A term policy expires when the term is up, while a permanent life insurance policy like whole life stays active for as long as you pay the premiums.
  • Whole life insurance has a cash value that works like a savings account and can grow or lose value over time.

Because of the cash value and associated fees, whole life insurance is six to 10 times the cost of comparable coverage with term life. For this reason, whole life isn't the right choice for most people. It can be useful for people with complex financial plans, but a majority of people will benefit more from a simple term life policy that they can afford.

➡ Learn more about the differences between term life insurance versus whole life insurance.

Best insurance companies for term life insurance

What is the best term life insurance company for you? That depends on your specific situation. Most people prefer to choose the carrier that offers the best price and that’s a good starting point.

However, you should also consider a company’s customer service record, ratings from J.D. Power, A.M. Best and the Better Business Bureau, and what tasks you can do online versus on paper or over the phone, for your convenience. Use the table below to see Policygenius’ reviews for every life insurance company we work with.

INSURANCE COMPANYPOLICYGENIUS RATING (OUT OF 10)
Banner Life8.2
Lincoln Financial7
AIG8
Mutual of Omaha7
Prudential7.5
Protective7.7
Pacific Life8
Principal8.3
Transamerica7.1
SBLI7.4

You should also take into account how each company treats certain health conditions and lifestyle choices. This can make a huge difference in the final cost of your term policy.

See our full page dedicated to the best life insurance companies and start your search with the best carriers for your specific scenario.

Types of term life insurance

While term life insurance is the most basic, straightforward type of life insurance, there are still variations on it so you can get the insurance policy that fits your needs. These include:

  • Level term life insurance — The premiums remain the same for the life of the policy. Learn more about level term life insurance.
  • Annual renewable term life insurance — Renews on a year-by-year basis; premiums usually start lower than a standard term life policy and increase each year. Learn more about annual renewable life insurance.
  • Decreasing term life insurance — Premiums remain the same, but benefit amount decreases each year. Learn more about decreasing life insurance.
  • Return-of-premium term life insurance — Allows you to get your money back at the end of the term. Learn more about return of premium life insurance.
  • No-medical-exam term life insurance — Allows you to skip the medical exam and still receive coverage. Learn more about no-medical-exam life insurance.
  • Group term life insurance — Offered through the workplace, but not portable from employer to employer. Learn more about group life insurance.
  • Mortgage protection term life insurance — A type of decreasing term insurance where the beneficiary is your mortgage provider and the term is pegged to your mortgage length. Learn more about mortgage protection 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.