How term life insurance works: What it is, policy types, and pros & cons

A term life insurance policy is a contract that lasts for a set period of time (usually between 10-30 years) where the insurance company pays your beneficiaries a lump sum if you die while the policy is active.

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Antonio Ruiz-CamachoAntonio Ruiz-CamachoAssociate Content DirectorAntonio helps lead our life insurance and disability insurance editorial team at Policygenius. Previously, he was a senior director of content at Bankrate and CreditCards.com, as well as a principal writer covering personal finance at CNET.&Katherine MurbachKatherine MurbachEditor & Licensed Life Insurance ExpertKatherine Murbach is an editor and a licensed life insurance expert at Policygenius. Previously, she wrote about life and disability insurance for 1752 Financial, and advised over 1,500 clients on their life insurance policies as a sales associate.

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Adam MorganAdam MorganEditorial DirectorAdam Morgan is an editorial director at Policygenius who leads the life insurance team. Previously, he led editorial teams matrixed across multiple financial publications at Red Ventures — including Bankrate, NextAdvisor, Million Mile Secrets, and others.

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What is the definition of term life insurance?

Term life insurance is a contract between you and an insurance company that lasts for a set amount of time, called a term. You agree to make payments toward the policy, also known as premiums, for the duration of the policy, and in return the insurance company agrees to pay a sum of money to your beneficiaries if you die while your policy is active.

Term life is one of the most affordable life insurance coverage options on the market. It only lasts for a set term, and comes with few rules and tax restrictions. Term is the best life insurance policy option for most people looking to provide their family with a financial safety net to cover any debts — including a mortgage or personal loans.

How does term life insurance work?

Term life insurance is active for a set period of time or term, usually between 10 years and 30 years. During that term, you pay a monthly or annual premium to the insurance company, and in exchange the company pays a tax-free lump sum of money to your beneficiary if you die while the policy is in force.

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Types of term life insurance

There are many types of term life policies on the market, but the most common and affordable is level term life insurance.

Level term life insurance

Level term life insurance is a type of coverage where the death benefit and premiums are set when the policy is purchased, and remain the same over the life of the policy.  

Also known as a level premium policy, level term life is the most common and popular kind of term life insurance. In most cases, when people say “term life insurance,” they’re referring to level term policies.

Other types of term life insurance

Annual renewable term life insurance

Annual renewable life insurance is a type of term life that lasts for one year. You can renew it each year, but you’ll pay more as you age. Annually renewable term insurance is best for short-term life insurance needs because it eventually becomes more expensive than a comparable level term life insurance policy, where premiums stay the same throughout the duration of the policy.

Increasing term life insurance

An increasing term life insurance policy has a death benefit that increases in value at set intervals over the course of your coverage. For example, your benefit might increase by 5% every year. Rates are higher for this type of policy, and your premiums might fluctuate as opposed to level term, where they’re guaranteed to stay the same.

Decreasing term life insurance

Decreasing term life insurance is a policy with a set premium and a death benefit that gets smaller over the coverage period. Decreasing term life insurance is often used to protect a specific debt, like a mortgage; coverage lasts as long as the loan, and the benefit decreases as you pay it off.

Return-of-premium term life insurance

Return-of-premium life insurance (ROP) — sometimes called return-of-premium term life insurance — is a type of term life insurance that refunds your payments if you outlive your coverage. Though the refunded premiums sound appealing, ROP policies are a lot more expensive than term life insurance.

Convertible term life insurance

Convertible term life insurance is a type of term life policy that includes a rider that allows you to convert your policy to a permanent life insurance policy — as most term life policies do. As the end of your policy’s term approaches, you might realize you still need life insurance to provide a safety net for your beneficiaries. Convertible term life insurance can help you convert your term policy to a whole life policy, or another permanent policy that doesn’t expire.

Additional types of term life insurance

What are the pros & cons of term life insurance?

Term life is affordable and comes with few rules and tax limitations. On the other hand, term life policies only last for a set term, after which they expire.

Benefits of term life insurance

Term life insurance coverage is a good fit for most people looking to protect their income and provide a safety net for their family in their absence. 

  • Affordable: Term life is cheaper than other kinds of life insurance, so you can get the coverage you need at a manageable price. For instance, a 35-year-old female non-smoker who pays around $15 a month for a term life policy would have to pay more than $100 a month for the same amount of whole life coverage.

  • Easy to manage and understand: Term policies come with no complex tax implications and only a few restrictions. 

  • Access to coverage when you need it: Term life insurance provides financial protection during the period of your life when you have major financial obligations to meet, like paying a mortgage or funding your children’s education. 

Disadvantages of buying term life insurance

Everyone’s needs are different, so while term life insurance makes sense for many people, it can have limitations. Some of the features that can make term policies less attractive include:

  • Expiration date: At the end of the term (which can be between five and 40 years), you'll need to buy a new policy if you still want insurance.

  • Lack of cash value savings component: Term policies only offer a guaranteed lump-sum death benefit. By contrast, whole life insurance has a cash value that earns interest over time and is separate from the death benefit, which is attractive if you’re looking to diversify your investment portfolio or have long-term financial obligations or coverage needs.

Who should consider term life insurance?

People commonly buy term life insurance for the following scenarios:

  • Anyone looking for an affordable, easy way to offer their loved ones a financial safety net for a set period of time in the event of their death.

  • Newlyweds, married couples, and people who share expenses with a partner. Term life insurance can provide income protection for your dependents in your absence.

  • Parents, guardians, and people planning on having children. Term life insurance is an affordable way to provide a financial safety net when raising children.

  • Homeowners with a mortgage, or people with other significant debt. A term life policy can help your dependents cover any outstanding debts they might be responsible for in your absence.

Do you need term or whole life insurance?

Term life is a good option if you’re looking for an affordable life insurance policy that only lasts for a set period of time and doesn’t earn cash value. 

If you’re looking into life insurance as an investment alternative because you’ve already maximized your contributions to tax-advantaged accounts like a Roth IRA or a 401(k), you might want to consider whole life insurance instead. 

Whole life can also be a better option than term life if you have long-term financial obligations or coverage needs, like dependents who require lifelong care.

→ Read more about the differences between term life and whole life insurance

How much term life coverage do you need – and for how long?

Experts suggest your life insurance coverage should be 10 to 15 times your income. To get a better sense of how much life insurance you need, calculate your financial obligations and then subtract your liquid assets. The result is the amount of life insurance you need.

To get a sense of how long your life insurance coverage should last, consider the length of your financial obligations. You should choose a term length that’s long enough to cover all of them, but not so long that you end up paying for coverage you don’t need.

For example, if you have a 20-year mortgage, you’ll want a policy with at least a 20-year term to cover those mortgage payments. If you have children, consider how many years you’ll have to support them financially until they become financially independent, and how much you’ll need to cover their expenses.

We can help do the math for you. Use our life insurance coverage calculator to get a sense of how much coverage you need — and for how long.

Most common lengths of term life insurance

The most common lengths of term life insurance are 20 years and 30 years. Term life insurance policies can last as long as 40 years with some insurance companies, but there are other options with shorter terms, including five-year and 10-year term life insurance policies.

Picking a term life insurance length

When shopping for a term life insurance policy, consider the financial obligations you want to cover and how long these will last. 

If, for example, you have small children and want to provide a financial safety net to cover their expenses, including college tuition, until they’re financially independent, you might want to consider a 20-year or 30-year term life policy.

If you’re looking for a term life policy only to cover a 10-year personal loan, or are 10 years until retirement, then a term life policy with a similar term would work for you. 

How much does term life insurance cost?

A healthy non-smoker 30-year-old woman would pay less than $22 per month for a 20-year term life insurance policy with a death benefit payout of $500,000. A healthy non-smoker 30-year-old man would pay around $27 per month for a policy with the same term and death benefit. Life insurance rates are based on your age, health, and other determining factors, like your lifestyle habits.

Below you’ll find more average rate estimates for 10-year and 20-year term life insurance policies. 

10-year term life policy: Average monthly premiums

Age

Sex

$500,000 coverage amount

$1 million coverage amount

20

Female

$15.40

$22.68

Male

$19.96

$31.25

30

Female

$15.52

$23.40

Male

$18.92

$28.78

40

Female

$22.14

$35.44

Male

$26.31

$42.91

50

Female

$46.58

$82.02

Male

$56.52

$99.30

60

Female

$103.13

$191.28

Male

$139.63

$259.27

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Methodology: Average sample monthly estimated rates are for male and female non-smokers with a Preferred health rating buying a 10-year, $500,000 or $1 million term life insurance policy. Life insurance averages are based on a composite of policies offered by Policygenius from AIG, Banner Life, Brighthouse Financial, Foresters Financial, Lincoln Financial, Mutual of Omaha, Pacific Life, Protective, Prudential, Symetra, and Transamerica, and may vary by insurer, term, coverage amount, health class, and state. Not all policies are available in all states. Rate illustration valid as of 02/01/2023.

20-year term life policy: Average monthly premiums

Age

Sex

$500,000 coverage amount

$1 million coverage amount

20

Female

$20.50

$32.40

Male

$27.24

$44.76

30

Female

$21.64

$35.56

Male

$27.05

$45.98

40

Female

$33.28

$58.61

Male

$40.05

$71.61

50

Female

$71.62

$131.35

Male

$92.75

$175.15

60

Female

$186.55

$355.17

Male

$260.27

$500.42

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Methodology: Average sample monthly estimated rates are for male and female non-smokers with a Preferred health rating buying a 20-year, $500,000 or $1 million term life insurance policy. Life insurance averages are based on a composite of policies offered by Policygenius from AIG, Banner Life, Brighthouse Financial, Foresters Financial, Lincoln Financial, Mutual of Omaha, Pacific Life, Protective, Prudential, Symetra, and Transamerica, and may vary by insurer, term, coverage amount, health class, and state. Not all policies are available in all states. Rate illustration valid as of 02/01/2023.

Choosing your best term life insurance company

Choosing the best term life insurance company for you will depend on your particular situation. You should consider factors like your age, health, and the company’s standings when shopping for term life insurance.

  • Your health: Not all insurers treat all health conditions the same when it comes to setting rates and approving life insurance applications. Look for an insurer that aligns with your unique health profile to ensure you’ll pay the most affordable premiums.

  • Your age: Age is one of the most important factors that determine your rates when you buy life insurance, regardless of policy type. The older you get, the higher your rates will be since we all become riskier to insure as we age. Shopping while young and in good health can help you lock in the most affordable rates for the entire duration of your policy.

  • The company’s financial strength and customer satisfaction: Choosing an insurer that has strong financial ratings will help ensure that the company will be around and able to pay the death benefit to your beneficiaries if you die. And if you need to make changes to your term life insurance over the lifetime of the policy, like payment frequency or your beneficiaries, you’ll want to work with a company that has the customer service resources needed to help you along the way.

  • Policy availability: Look for a term policy, and insurer, that’s available in your state — not all of them do business in all 50 states.

Tips for how to shop for term life insurance

Look for a policy that provides enough protection for the time you need it at an affordable price. The best way to ensure that you find the best deal is by working with an independent broker like Policygenius. Independent brokers work with multiple insurance companies, so they can help you compare quotes and coverage options to make sure you pay the most affordable rate for only the coverage you need and nothing more.   

Determine how much life insurance you really need

Use our life insurance coverage calculator to get a good sense of how much coverage you really need. If you’d rather do it manually, here’s how.

  • Calculate your current and future financial obligations, including your annual income and any expenses your family will face, like bills, a mortgage, or childcare costs. 

  • Then calculate your liquid assets, including how much you have in savings accounts, and any other existing life insurance policies you may already have, like a group policy sponsored by your employer.

  • Subtract your liquid assets from your financial obligations. That’s the amount of coverage you need.

Customize your coverage with riders

Life insurance riders are policy add-ons that can provide supplemental coverage in specific circumstances. For example, if you’re diagnosed with an eligible critical illness, there’s a rider that lets you withdraw part of your death benefit to cover medical expenses or replace income if you can’t work due to your condition. 

Other riders offer additional coverage to certain family members, like your spouse or your children, while others let you modify your policy down the road if needed. The term conversion rider, for instance, allows you to convert your term life policy into a whole life policy when your policy expires.

Some riders are included at no cost, while others can be added for an additional fee. Not all riders are worth it, but depending on your particular circumstances, you might want to consider a policy that comes with a rider that ensures you’ll have the right protection.

An independent broker can help you navigate your options and pick the riders that match your particular coverage needs at an affordable price.

Compare quotes from multiple companies

Life insurance is federally regulated, so no insurer can offer you any discount on their rates. But every life insurance company treats the different factors that determine your rates — including your age and, most importantly, your health — in a different way. 

That’s why the best way to ensure you’ll pay the most affordable term life insurance rates is to compare quotes from multiple insurers. And the best way to do so is by working with an independent broker like Policygenius. 

At Policygenius, our brokers are licensed in all 50 states and can walk you through the entire life insurance buying process while offering transparent, unbiased advice tailored to your personal situation.

Ready to shop for the best term life insurance?

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What happens when term life insurance expires?

When your term life insurance policy ends, you have a few different options. 

  • Let the policy expire. Many people choose coverage that will last until retirement, at which point they might not need life insurance at all.

  • Convert to a permanent policy. Many insurers allow you to convert your term policy to a permanent life insurance policy as you’re approaching the end of your term, if you still need a small amount of coverage.

  • Renew your policy at a higher premium. Some term policies renew at a higher price every year, so you can keep the same coverage if you’d like, and just pay more.

  • Apply for a new policy. If your term ends, you can always apply for another term policy if you need coverage for a few more years. 

Do you get your money back at the end of a term life policy?

No. Much like with other types of insurance, you pay your premium in exchange for coverage. For instance, an insurance company will not refund your car insurance premiums if you don’t get into an accident. 

There are some exceptions with return-of-premium products — a type of term life insurance that refunds your payments if you outlive your coverage. But due to their high cost, they’re typically not the most effective use of your money, since you can usually get higher returns elsewhere and this type of policy is much more expensive than standard term life.

What happens if you outlive your term life insurance policy?

Once your policy expires, you’re no longer covered. If you outlive your term life insurance policy, your beneficiaries won’t receive the death benefit.

Consider a convertible policy

Convertible term life insurance policies include a rider that allows you to convert your policy into a permanent life insurance policy if the expiration date on your policy approaches and you still need life insurance coverage. Most term life insurance policies are convertible.

Frequently asked questions

What happens to term life insurance at the end of the term?

When a term life insurance policy reaches the end of its term, it expires. If the insured person dies after the term life policy’s expiration, their beneficiaries don’t receive a death benefit.

Which is better, term life or whole life insurance?

Term life is a better choice for most people looking to protect their income and provide their family with a financial safety net to cover any debts — it’s affordable, only lasts for a set term, and comes with few rules and tax restrictions. Whole life is a better option for people looking to diversify their investment portfolio or those with long-term financial obligations or coverage needs. Unlike term, whole life never expires and comes with a cash value that earns interest in addition to the death benefit payout, but is five to 15 times more expensive than term life.

What is the meaning of term life insurance?

Term life insurance means that it’s a policy that lasts for a set amount of time, or a term, and pays a lump sum of money to the policyholder’s beneficiary in the event they die.

What is the difference between whole life and term life insurance?

Term life only lasts for a set period of time and its main purpose is to provide a payout in the event the policyholder dies while the policy is active. Whole life insurance never expires as long as you pay the premiums, and in addition to the death benefit payout that standard term life policies offer, comes with a cash value that earns interest over time.

Can you cash in a term life insurance policy?

No, you can’t cash in a term life insurance policy because this type of policy doesn’t come with a cash value component.

Authors

Antonio helps lead our life insurance and disability insurance editorial team at Policygenius. Previously, he was a senior director of content at Bankrate and CreditCards.com, as well as a principal writer covering personal finance at CNET.

Katherine Murbach is an editor and a licensed life insurance expert at Policygenius. Previously, she wrote about life and disability insurance for 1752 Financial, and advised over 1,500 clients on their life insurance policies as a sales associate.

Editor

Adam Morgan is an editorial director at Policygenius who leads the life insurance team. Previously, he led editorial teams matrixed across multiple financial publications at Red Ventures — including Bankrate, NextAdvisor, Million Mile Secrets, and others.

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