Term life insurance is the most affordable and straightforward type of life insurance. Find out how to get financial protection without breaking the bank.
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byPatrick Hanzel, CFP®
Patrick Hanzel, CFP®
CERTIFIED FINANCIAL PLANNER™ & Advanced Planning Team Lead
Updated September 22, 2021|4 min read
A term life insurance policy delivers affordable financial protection to your family and gives you peace of mind. 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. Because of low pricing and simplicity, a term policy is the best kind of life insurance for most people. If you’re ready to shop for life insurance, you don’t have to do it alone. We can help you find the most robust coverage for a competitive price.
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Term life insurance works by guaranteeing financial protection for your family over a specific period — the term — before expiring. If you die before the term ends, your beneficiary receives a death benefit, a tax-free lump sum of money that can be used to cover funeral costs, bills, or any other expenses.
Terms usually last from 10 to 30 years and you pay a monthly or annual premium, which is determined using your policy details and your health and demographic information. This is different from permanent life insurance, which lasts for the rest of your life and comes with a cash value.
People often choose term over whole life insurance because it’s affordable and straightforward. You can choose your term length and coverage amount so you don’t pay for more financial protection than you need. And unless you have a unique financial situation or lifelong dependents, going with term life insurance will make more sense.
|Term life insurance policy features|
|Policy duration||10-30 years|
|Guaranteed death benefit?||Yes|
Term life insurance rates are determined by your age, health history, hobbies (risky activities can cost you), coverage amount, and term length. If you add riders to your policy, that will also impact how much you pay.
When deciding how much term life insurance you need, you should factor in outstanding debts, future costs, dependents, and end-of-life expenses. Your policy should last as long as your longest debt (such as a mortgage) and should cover any remaining costs when you subtract your debts from your existing assets.
While traditional term life insurance, also called level term life insurance, is the most straightforward type of life insurance and the right one for most people, there are some variations of term life that might be a better fit for your needs. These include:
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
Decreasing term life insurance: Premiums remain the same, but benefit amount decreases each year
Group term life insurance: Offered through the workplace and often subsidized, but not portable from employer to employer. (So if you have life insurance through your employer and then go to a different job, that life insurance will not be active any longer)
Mortgage protection insurance: Decreasing term insurance where the beneficiary is your mortgage provider and the term and benefit amount are tied to your mortgage length
Return of premium term life insurance: Allows you to get your premium payments back at the end of the term
Increasing term life insurance: Can have set or varying premiums, depending on the insurer; the death benefit amount grows over the life of the policy
Most insurance shoppers will ultimately decide between buying term life insurance or whole life insurance.
Here’s a quick comparison guide:
|Features||Term life insurance||Whole life insurance|
|Cost||$20-30/month||5-15 times more than term|
|Guaranteed death benefit?||Yes||Yes|
|Guaranteed cash value?||No||Yes|
|How cash value grows||N/A||Earns interest at a predetermined fixed rate|
|Premiums||Can increase periodically or stay level for the policy duration||Level|
|Notes||No risk of losing coverage, but no cash value when term ends||No risk compared to other permanent types, but you may find better investment options elsewhere|
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One of the benefits of term life insurance is that the policy expires at the end of the term, allowing you to 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
Which option you choose depends on your financial obligations. 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.
If you outlive your policy’s term and let the policy expire, you won’t receive a refund of the premiums you’ve paid into it.
After working with an agent to find the right life insurance company, type of policy, coverage amount, and term length, you'll go through the underwriting process, so an insurer can evaluate your background and determine your health classification, which sets your life insurance premiums. You won’t officially have coverage until you sign your policy documents and pay your first premium.
The best term life insurance company for you depends on your specific situation and we’re here to help you every step of the way.
Policygenius carefully assesses the top life insurance companies to determine where they stand on all of the above. We have dozens of unbiased reviews and ratings, along with expert advice from licensed agents who don’t work on commission.
Term policies last for a set period (usually 10-30 years) and pay out a death benefit to your beneficiaries if you die during that time.
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 will not receive a refund of premiums you’ve paid.
Your policy should offer coverage at least 10-15 times your income and enough to cover your largest debt. You should also factor in future expenses, like childcare or a mortgage.
Your term should be at least as long as your longest debt (e.g., your mortgage), and last as long as you anticipate having dependents.