Term life insurance: What is it & how does it work?

Term life insurance: What is it & how does it work?

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Amanda Shih

Amanda Shih

Editor & Licensed Life Insurance Expert

Amanda Shih is an editor and a licensed life, disability, and health insurance expert at Policygenius, where she writes about life insurance and disability insurance. Her expertise has appeared in Slate, Lifehacker, Little Spoon, and J.D. Power.

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Rebecca Shoenthal

Rebecca Shoenthal

Editor & Licensed Life Insurance Expert

Rebecca Shoenthal is a licensed life, disability, and health insurance expert and a former editor at Policygenius. Her insights about life insurance and finance have appeared in The Wall Street Journal, Fox Business, The Balance, HerMoney, SBLI, and John Hancock.

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Expert reviewed

This article has been reviewed by a licensed Policygenius expert to ensure that sources, statistics, and claims meet our standard for accurate and unbiased advice.

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Patrick Hanzel, CFP®

Patrick Hanzel, CFP®

Certified Financial Planner™ & Advanced Planning Team Lead

Patrick Hanzel, CFP®, is a Certified Financial Planner™ and Advanced Planning Team Lead at Policygenius. His expertise has been featured at Lifehacker, Consumer Affairs, Authority Magazine, Thrive Global, and Fatherly.

Updated April 28, 2022 | 7 min read

Policygenius content follows strict guidelines for editorial accuracy and integrity. Learn about our editorial standards and how we make money.

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Policygenius content follows strict guidelines for editorial accuracy and integrity. Learn about our editorial standards and how we make money.

Amanda Shih author photoRebecca Shoenthal author photo

By

Amanda Shih

Amanda Shih

Editor & Licensed Life Insurance Expert

Amanda Shih is an editor and a licensed life, disability, and health insurance expert at Policygenius, where she writes about life insurance and disability insurance. Her expertise has appeared in Slate, Lifehacker, Little Spoon, and J.D. Power.

&

Rebecca Shoenthal

Rebecca Shoenthal

Editor & Licensed Life Insurance Expert

Rebecca Shoenthal is a licensed life, disability, and health insurance expert and a former editor at Policygenius. Her insights about life insurance and finance have appeared in The Wall Street Journal, Fox Business, The Balance, HerMoney, SBLI, and John Hancock.

Expert reviewed

Expert reviewed

This article has been reviewed by a licensed Policygenius expert to ensure that sources, statistics, and claims meet our standard for accurate and unbiased advice.

Learn more about our editorial review process.

by

Patrick Hanzel, CFP®

Patrick Hanzel, CFP®

Certified Financial Planner™ & Advanced Planning Team Lead

Patrick Hanzel, CFP®, is a Certified Financial Planner™ and Advanced Planning Team Lead at Policygenius. His expertise has been featured at Lifehacker, Consumer Affairs, Authority Magazine, Thrive Global, and Fatherly.

Updated April 28, 2022 | 7 min read

Policygenius content follows strict guidelines for editorial accuracy and integrity. Learn about our editorial standards and how we make money.

Term life insurance is one of the most popular types of life insurance available because it’s straightforward, affordable, and lasts as long as you need — for most people, that’s between 10 and 40 years. Premiums can be paid monthly or annually, and in exchange for relatively low rates, your beneficiaries get a tax-free lump sum of money after you die.

Why shop with us for term life insurance

Finding the right term coverage doesn’t have to be complicated. Our licensed agents are here to help you compare quotes, find savings, and choose the policy that works for you. Not sure how long your coverage should last or how much you need? We’ll help you customize a term policy that you can feel good about.

What is term life insurance?

Term life insurance guarantees financial protection for your family over a specific period — the term — before expiring. If you die before the term ends, your beneficiary receives a life insurance death benefit that can be used to cover funeral costs, bills, or any other expenses. Because of low pricing and simplicity, a term policy is the best kind of life insurance for most people.

FeaturesPolicy overview
Policy duration10 to 40 years
Average cost$21 to $152/month
Guaranteed death benefit?Yes
Cash value?No

Methodology: Average cost range is based on internal actuarial rate tables for 10 life insurance carriers that offer policies through the Policygenius marketplace (AIG, Banner Life, Brighthouse, Lincoln Financial, Mutual of Omaha, Pacific Life, Protective, Prudential, SBLI and Transamerica). Prices represent the average monthly life insurance premium for male and female non-smokers in a Preferred health classification, buying a 20-year, $500,000 term life policy. Individual rates may vary, depending on age, gender, state, health profile, and other eligibility criteria.

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How does term life insurance work?

Unlike permanent life insurance, which lasts for the rest of your life and comes with a cash value, term life is easy to manage and cost-effective. Terms usually last 10 to 40 years, after which you can renew your policy, convert it to permanent coverage, or let the policy expire. 

Premiums are based on several factors — including your age, gender, health, and policy choice — and can be paid on a monthly or annual basis. 

You can choose your term length and coverage amount so you don’t pay for more financial protection than you need.Unless you have a unique financial situation or will be providing lifelong financial support, term life coverage makes more sense for the average person.

Types of term life insurance

While traditional term life is the most straightforward type of life insurance and the right option for most people, there are some variations of term life that could fit your needs. For example, younger and healthier applicants who want to skip the medical exam can apply for a no-med term policy to get covered faster. Working on improving your health? A yearly renewable term policy may be worth considering.  

No-medical-exam

A term life policy with no medical exam requirement makes getting a policy fast and contactless. Instead of a medical evaluation, the insurance company makes an application decision based on your existing health records and a phone interview. You can get competitively priced coverage in as little as 24 hours. People with few health concerns are more likely to qualify.

Annual renewable

An annually renewable policy (also known as yearly renewable) has a term that lasts just one year. You need to renew each year to continue your coverage, with rate changes at each renewal. Premiums usually start lower than for a policy with a longer term, but eventually become much higher the longer you renew. 

This is a useful option if you only need coverage for a brief period or if you’re making health and lifestyle changes that could earn you lower rates on a policy with a longer term in a few years. For example, if you’re quitting smoking or working on lowering your cholesterol, you might benefit from having an annual renewable policy while you build a track record of treatment and improvement.

Decreasing term

In a decreasing term policy, your premiums stay the same but your death benefit goes down the longer you have the policy (usually each year). Decreasing term policies typically don’t have medical requirements for approval, but that means they’re usually more expensive than a traditional term policy. A traditional policy will also provide more coverage for the price.

Other types of life insurance

Group life insurance

This is a type of annual renewable insurance that’s offered through an organization you belong to — for most people, it’s their employer. Premiums are covered mostly or entirely by the organization and there are no health restrictions to get covered. Group policies are limited in that they usually don’t offer enough coverage and you rarely keep them if you leave a job,

Mortgage protection insurance (MPI)

MPI is a type of decreasing term policy where the coverage is tied to your mortgage loan. The term lasts the length of your loan and the death benefit decreases as you pay off your mortgage. The beneficiary of MPI is your lender, not your family.

Return of premium (ROP)

Return of premium is sometimes sold as a standalone policy and more often seen as a rider you can add to your coverage for an extra cost. ROP coverage refunds your previous premium payments if you outlive your term coverage. However, the policies are pricey. 

Increasing term

An increasing term policy has a death benefit that goes up at set intervals over the course of your coverage. For example, your benefit might increase by 5% every year. Premiums can fluctuate, depending on your insurer. Rates are higher for this type of policy.

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Term life insurance vs. whole life insurance

Most insurance shoppers will ultimately decide between buying term or whole life insurance. We generally recommend term over whole life insurance because it’s more affordable and few people need the extra features included in whole life.

Cost of premiums

Whole life costs 5 to 15 times more than term life for similar coverage amounts. That’s because whole life lasts longer and has an additional savings feature called the cash value. If price is a priority and you don’t think you’ll support someone financially for the rest of your life, term life is a better option. Here’s a quick cost comparison for 35-year-olds buying a $500,000 policy:

Sex   Policy typeMonthly premium 
FemaleTerm       $25.53          
       Whole      $481.00         
Male  Term       $30.32          
       Whole      $571.00         

Methodology: The chart above reflects rates, as of April 27, 2022, for 35-year-old male and female non-smokers in a Preferred health classification, buying a $500,000 term life policy with a 20-year term and a $500,000 whole life policy paid up at age 99. Rates are based on the monthly Policygenius Life Insurance Price Index and policies from MassMutual. Prices in the index are determined by internal actuarial rate tables for 10 life insurance carriers that offer policies through the Policygenius marketplace: AIG, Banner Life, Brighthouse, Lincoln Financial, Mutual of Omaha, Pacific Life, Protective, Prudential, SBLI, and Transamerica.

Availability of coverage

Term and whole life insurance are the two most common types of coverage, so you’ll be able to buy either from most life insurance companies. Some providers may have more types of term policies to offer you — for example, you might be able to choose a no-exam term policy or one with a medical exam. It’s much harder to find a provider that will offer you whole life insurance without a medical exam at the same level of coverage you would get if you took an exam.

Investment value

One major reason people choose to buy a whole life policy is the cash value savings feature. This works like an investment account that’s funded by part of your premiums each month. The cash value grows at a rate set by your provider.

If you’ve already maxed out your other investment options or you are a person with a high net worth, you could consider a whole life policy for its investment value. However, interest growth is low compared to a 401(k) or IRA, and you’ll pay more to have the long-term coverage.

Who should consider term life insurance?

A term life policy is best for the majority of people because it’s simple and budget-friendly. If you eventually plan to pay off your debts, support your retirement with your savings, and get to a point where no one depends on your income, then a term policy is an ideal financial protection option. 

Benefits of term life insurance

The main benefits of buying a term life policy are:

  • Low cost: Compared to every other type of life insurance, rates are significantly cheaper. This makes it easy to keep your policy active while saving and investing.

  • Flexibility: Customizable term lengths and coverage amounts mean you can buy financial protection specific to your needs. 

  • No cancellation penalty: Unlike other policies, there’s never a fee or penalty for canceling term life coverage. If you don’t need it anymore, you can simply end your contract.

  • Simplicity: Policies with a cash value have fees, interest rates, and other features to manage. Term life has none of those, making it easy to use for its main function: supporting your family in a worst-case scenario.

Is term life insurance worth it?

Yes, if anyone relies on you for financial support or you have shared debts, it’s worth buying a term life policy. The affordable rates, compared to the amount of financial protection you can buy for your family, make it a great value for your money. And if your policy doesn’t fit your needs anymore, it’s easy to update or end your coverage in the future.

How much term life insurance do you need?

When deciding how much term life insurance to buy, aim for 10 to 30 times your income and factor in:

  • Outstanding debts

  • Dependents

  • Future expenses

  • End-of-life costs 

Your policy should last as long as your longest debt and should cover any other financial obligations.

→ Calculate how much life insurance you need

What happens when the term ends?

One of the benefits of term life insurance is that the policy expires at the end of the term, so you can reassess your needs. You might decide you need less coverage or no coverage at all. When your policy is ending, you can:

  • Convert your term policy into a permanent policy.

  • Keep your current policy at a higher premium.

  • Buy a new policy.

  • Let the policy expire.

If you’re still saving for retirement, paying off a mortgage, or raising children, it may make sense to keep your current policy at a higher cost or shop for a new one. Once you accomplish your financial goals and/or no longer have dependents, you probably don’t need a policy anymore.  

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

You don’t get a refund on your premiums if you outlive your policy (unless you bought return of premium coverage). As noted above, we don’t recommend return of premium policies because of their high cost. 

The only exception is if you cancel your policy in the middle of a billing cycle or during the initial free look period. The free look period is usually the first 30 days of your policy. If you cancel during this time your first premium is refunded. If you cancel in the middle of a billing cycle, you’ll be refunded a prorated amount from your most recent premium payment.

Getting term coverage shouldn’t be stressful. Our licensed agents can help you compare quotes and answer questions so you can get the life insurance you need at an affordable price. 

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Frequently asked questions

What does term life insurance do?

Term policies last for a set period (usually 10 to 40 years) and pay out a death benefit to your beneficiaries if you die during that time.

What happens at the end of a term insurance policy?

If you outlive your term policy, you can either let it expire, buy a new policy, renew at a higher premium, or convert it into a whole life policy. You won’t be refunded premiums you’ve already paid.

What does term life insurance cover?

A term life policy covers most causes of death, including illness or injury. The payout can be used to cover any expenses.

Which is best, term life insurance or whole life insurance?

Term life is right for most people. The added features in whole life aren’t worth the high cost in most cases.

Do you lose money with term life insurance?

You lose your premiums and your beneficiaries don’t get a death benefit if you outlive a term life policy. However, alternative policies that return your premiums aren’t worth the extra cost.