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.
Purchasing term life insurance is one of the most popular ways to create a financial safety net. Money experts like Dave Ramsey and Suze Orman prefer term life insurance to other types of insurance because it’s straightforward, affordable, and comprehensive.
For these reasons, term life insurance is the right financial product for a vast majority of life insurance shoppers.
In this article:
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|
|Guaranteed Death Benefit?||Yes|
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:
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.
If you outlive your term life policy, the policy expires and you are no longer covered. You have several options after that:
If you die while the policy is still in force, your beneficiaries receive the death benefit. They can use this money for whatever they wish; the flexibility of the death benefit is one of the benefits of life insurance.
This is typically one tax-free lump sum payment or an annuity; however, it can also be paid out in installments, the balance of which can gain interest (although any gains are taxable).
There are some instances, such as those of fraud or suicide, during which your term life policy won’t pay out.
Some types of permanent life insurance, like whole life insurance, have a cash-value component that can grow over time like an investment. However, term life insurance does not, which also helps to keep the cost low.
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.
Methodology: Sample based on 20-year term life insurance policy for a non-smoker male in Preferred health rating.
In general, life insurance costs are determined by:
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.
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:
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.
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.
Wondering if term life insurance is right for you? Consider the potential pros and cons:
|Cheapest life insurance option||Coverage doesn’t last your entire life|
|Lasts for a set period of time so you aren’t paying for coverage you don’t need||Doesn’t provide a cash-value component|
|Provides enough financial assistance to pay off debts, cover future costs, and provide a financial safety net|
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:
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.
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.
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.
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:
Updated June 25, 2019
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Yes, we have to include some legalese down here. Read it larger on our legal page. Policygenius Inc. (“Policygenius”) is a licensed independent insurance broker. Policygenius does not underwrite any insurance policy described on this website. The information provided on this site has been developed by Policygenius for general informational and educational purposes. We do our best efforts to ensure that this information is up-to-date and accurate. Any insurance policy premium quotes or ranges displayed are non-binding. The final insurance policy premium for any policy is determined by the underwriting insurance company following application. Savings are estimated by comparing the highest and lowest price for a shopper in a given health class. For example: for a 30-year old non-smoker male in South Carolina with excellent health and a preferred plus health class, comparing quotes for a $500,000, 20-year term life policy, the price difference between the lowest and highest quotes is 60%. For that same shopper in New York, the price difference is 40%. Rates are subject to change and are valid as of 2/17/17.
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