Term life insurance is an option for anyone looking to protect their loved ones against unexpected financial expenses upon their death, such as childcare costs or mortgage payments — and for a certain period of time, or “term.”
According to Alison Salka, senior vice president and research director at LIMRA, term life insurance acts as a short-term financial safety net. Compared with permanent life insurance options such as whole life and universal life, term life insurance is simpler and less costly.
Term vs. Whole Life Insurance
Unlike permanent life insurance, which offers a guaranteed death benefit as well as a savings or investment component, term life is a single-purpose product that provides a death benefit with an expiration date. A term life insurance policy can cover you for a number of years — one, 10, 20, or 30, depending on the policy you’ve chosen.
If you, as the insured person, die within the policy term, your beneficiaries receive a death benefit equal to the amount of coverage you’ve selected. If you are alive at the end of the term, the policy expires and the death benefit is lost. That said, many term life policies include a conversion option — available up to a certain age — that allows you to turn your term life policy into permanent life insurance.
While there are other term life insurance options or subcategories, the most popular is level term insurance, which features a fixed death benefit and premiums. Other options offer a death benefit that decreases over time or shorter terms that must be renewed annually and may increase in price.
Here’s how term life insurance stacks up against whole life insurance, a leading form of permanent insurance:
|Term vs. Whole Life Insurance|
|Term Life Insurance||Whole Life Insurance|
|Protects for a limited time — one to 30 years, or up to a specific age limit||Does not expire, as long as you keep up with premium payments|
|Features lower premiums||Has a savings or investment component called the “cash value”|
|Has no cash value, only a death benefit||The cash value may be used as retirement income or to cover premium payments|
As you can see, there are major differences between term life insurance and whole life insurance. For starters, whole life offers a death benefit that’s valid for the policyholder’s entire life and includes other benefits like cash value, which in turn increases premium payments.
If you’re looking for lower premiums and only need the death benefit for a limited time, term life insurance could be the best alternative.
How Much Does Term Life Insurance Cost?
Since term life insurance policies cover you for a set period instead of your whole life, their premiums can be much more affordable than those of permanent policies. That’s useful, not least because perceived high premiums are a leading reason people don’t buy life insurance, according to the 2020 Insurance Barometer Study.
Life insurance expert Jeff Root tells us that a 30-year-old female in good health could pay as little as $31 a month for term life insurance, while a male of the same age and in good health can expect to pay around $36.
The sooner you purchase term life insurance, the lower your premium will be. Since your age and health are two of the most important factors that influence what you pay for coverage, your premiums will increase with the likelihood of developing health issues as you age.
How Term Life Insurance Premiums Are Determined
Besides your age and health, these factors help determine term life premiums:
- Gender – Statistically, women tend to live longer than men, so their premiums tend to be lower.
- Habits – Habits that may increase your risk of dying or developing an illness will increase your premiums, such as smoking or using tobacco products.
- Coverage Amount and Term Length – Your premiums will also depend on how much life insurance you purchase. The larger the death benefit, the higher your premiums. Longer terms also cost more.
- Riders – Riders or policy add-ons can help you customize your coverage. One popular rider commonly paired with term life insurance is “return of premium,” which lets you recoup premiums paid through the life of the policy if it expires. Riders can increase your premiums by as much as 10% to 30%.
When You Need Term Life Insurance
If you’re getting married, starting a family, or buying a house, you should be thinking about life insurance, of any type. And your policy should be in effect as long as your family depends on your income. Term life insurance is an excellent option for those with dependents but not a lot of disposable income to invest in a permanent life insurance policy.
Even if you don’t have someone that depends on you financially, a term life policy may cover your future funeral costs or benefit your cosigners if you happen to die with unsecured debt such as credit cards or student loans.
When You Don’t Need Term Life Insurance
If you don’t have dependents or outstanding debt and don’t need a death benefit to cover final expenses, you may not need term life insurance.
If you have disposable income and want to use your life insurance policy as an investment or to cover estate taxes, you may want to consider whole life insurance or universal life insurance instead of a term life policy. While premiums will likely be higher, the cash value of such policies should offer some return for the extra you’ll pay.
However, like most investments, permanent life insurance comes with risks — especially with a universal or variable life insurance policy, where the savings component is invested in stocks or bonds. Some such policies do, though, guarantee you a certain return on their investment portion. Still, this insurance type is generally a better option for those with a higher risk tolerance looking for flexible premiums.
Advantages and Disadvantages of Term Life Insurance
|Pros and Cons of Term Life Insurance|
|Pros of Term Life||Cons of Term Life|
|Lower premiums||The policy expires upon reaching the term|
|Easy to understand||There is no cash value|
|Many policies include the option to convert to permanent life insurance later on||If you have health issues, you may not be able to convert the policy to permanent or renew it for the same premium|
|An affordable option for younger and/or less affluent families||Can only be converted to a permanent policy with the same insurer from which you purchased the policy|
Again, the main appeal of term life insurance is its lower premiums. A whole life insurance policy can cost 5 to 10 times more than term because of its cash value component. If you have health issues, however, term life may not be the best option, depending on the insurer.
Talk to a Professional
While you can ask an insurance agent for recommendations based on your goals and financial situation, remember that they’re earning a commission for selling you a policy and may not always have your best interest in mind.
Since the type of and amount of life insurance coverage you choose will depend on your financial goals and situation, experts across the field of insurance recommend speaking with a financial planner before purchasing life insurance.
A qualified professional can help you determine which policy type and coverage amount best fit your budget and your family’s financial needs.
FAQs About Term Life Insurance
How Much Term Life Insurance Do I Need?
If you’re purchasing term life as a form of income replacement for you or your spouse, the death benefit should reflect the capital your beneficiaries would need to cover living expenses and other financial responsibilities after your death.
When calculating your insurance needs, factor in your debt and financial obligations, funeral expenses, and things like your company-sponsored health insurance and services you provide your family (childcare, tax preparation, etc.).
Once you have determined how much annual income your dependents would need, multiply that amount by the number of years they would need financial support. Some experts recommend purchasing from 10 to 12 times your annual income in life insurance coverage, but this calculation doesn’t consider inflation.
Can I get term life insurance without a medical exam?
Whether or not you need a medical exam to get approved coverage will depend on the type of policy you’re considering. One term life insurance option that doesn’t require a medical exam is simplified issue insurance. This type of insurance is recommended for younger individuals in good health who need coverage quickly.
Simplified issue policies feature a short approval time and you only need to answer a health questionnaire to get approved. Since the insurer must underwrite the policy with less information, there is more risk involved, so this type of policy can be more expensive and feature lower coverage amounts.
If you have any pre-existing health issues, you may want to consider a whole life policy with guarantees. But, of course, these will come at a higher rate.
Is the death benefit taxable?
According to the IRS, death benefit payouts generally aren’t considered to be gross income and so don’t have to be reported on your income tax return. However, you should report any interest you receive from the policy.
Who can be a life insurance beneficiary?
A life insurance beneficiary can be a person, entity, or institution. You can name more than two people as beneficiaries, as well as giving the proceeds to trusts, charities, or estates.
There are two levels of beneficiaries: primary and contingent. If your primary beneficiaries have passed away or cannot be located, the death benefit will go to your contingent beneficiaries. If the contingent beneficiaries cannot be found, the death benefit payout will go to your estate.
How soon can beneficiaries claim a death benefit?
After the death of the insured, beneficiaries should contact the insurer as soon as possible to begin the claims process. Usually, states allow insurance companies to take 30 days to review the claim, approve or deny it, or ask for additional information. That may mean covering funeral costs out of pocket and then waiting to get reimbursed.
Typically, life insurance payouts are issued between 30 to 60 days after the claim has been submitted, unless the insured passed away within two years of purchasing the policy. Standard payout methods are lump sum, installment and annuities accounts, or retained asset accounts.
Term Life Insurance in a Nutshell
Term life insurance is one of the simplest and most accessible types of life insurance. It pays out a predetermined death benefit to your loved ones if you die within the policy term, which can span anywhere from one to 30 years.
Many term life products also include the option to convert the policy to permanent life insurance before the term expires, allowing you to create a flexible financial plan with room for future growth.
If anyone depends on you financially or you want to cover funeral expenses or debt after your death, term life insurance generally offers death benefits at lower premiums when compared to permanent life insurance.
See Money’s Best Life Insurance Companies of 2020 to read our recommendations of fine insurers and get life insurance quotes.