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By Ana ReinaHeidi Rivera and Gabriel Rodriguez
Updated: May 4, 2021 11:20 AM ET | Originally published: April 29, 2021
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Money

Term life insurance offers a more affordable option than permanent life insurance for anyone looking to protect their loved ones against unexpected financial expenses upon their death. Read our guide on what is term life insurance to understand how it works, who it’s for, and how to get it.

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What Is Term Life Insurance?

Term life insurance is a type of life insurance coverage that expires after a certain length of time or a “term.” It is also known as “term assurance” or “pure life insurance.” Until its expiration date, the policy guarantees payment to a beneficiary (or beneficiaries) if the insured dies.

Elements of a Term Life Insurance Policy

Term life insurance policies consist mainly of a death benefit and a predefined term limit. The death benefit is the amount of money that goes to your beneficiary or beneficiaries if you pass away during the policy’s term limit. The term limit typically ranges between 5 and 30 years, with the most popular option being a 20-year term.

Eligibility

When purchasing a new policy, you’ll have to disclose details such as your age, height, gender, employment information, medical history, and lifestyle (whether you smoke, drink, have a high-risk job, or practice any extreme sports), for the insurer to determine your eligibility for coverage.

If you develop a terminal illness or severe chronic disease, you may not be able to renew your policy unless you have a “guaranteed insurability” rider.

Types of Term Life Insurance

There are three main types of term life insurance policy: level term insurance, decreasing term insurance, and renewable term insurance.

  • Level term insurance – Most consumers go for this policy. The Insurance Institute of Information says that 97% of all term policies are level premium. With this type of policy, both the premiums and the death benefit remain the same for the term.
  • Decreasing term life – This policy is usually cheaper to acquire upfront than level term life insurance policies. Still, there’s one caveat: although premiums remain the same, the death benefit decreases in one-year increments.
  • Renewable term – If your family has a history of medical conditions, then a renewable term policy may be an excellent option to explore. With this type of policy, you can extend coverage without undergoing a medical exam. However, premiums are assessed annually, usually increasing as you age.

Death Benefit

Term life policies provide what’s known in the industry as a “death benefit.” If you die within the policy’s term, your beneficiary (or beneficiaries) will receive a lump-sum payment for the amount specified within your contract.

Duration of Coverage

Term life insurance coverage typically lasts for a specific period of time, although some companies offer policies that are renewable annually. Once the term ends, you can then renew the policy, turn it into a whole life policy, or simply allow it to lapse.

How Does Term Life Insurance Work?

According to Alison Salka, senior vice president and research director at the Life Insurance Marketing and Research Association (LIMRA), term life insurance works as a short-term financial safety net. A term life policy can safeguard the financial security of your dependents, loved ones, and/or business, but only for a pre-established time.

For example, if you take out a 20-year policy and pass away due to a traffic accident, your partner may be able to continue with your joint loan payments without making any significant financial sacrifices. Your children might make use of that money to pay for their college education.

How Much Does Term Life Insurance Cost?

Since term life insurance policies cover you for a set period of time instead of your whole life, premiums can be much more affordable than permanent coverage. Life insurance expert Jeff Root tells us that a 30-year-old female in good health could pay a monthly premium of $31 for term life insurance, while a male of the same age and good health can expect to pay around $36.

Underwriting Process

Underwriting is part of an insurance company’s risk assessment process. For medical underwriting, insurers examine key details — your health and medical history, lifestyle, occupation, financial status, and any other factors that may affect your life expectancy — to determine how likely you are to die within the policy’s established term limit.

Riders

Insurance riders are add-ons that a policyholder can buy to provide extra benefits which their policy does not cover. This supplemental coverage can allow you to access the money from your death benefit while you’re still alive or even convert your term policy into a permanent one at the end of its term.

What Can Cause a Claim Denial

Although it’s unusual for life insurance companies to deny a claim, certain conditions may cause a claim to be disputed. These include but are not limited to the following:

  • Failing to disclose a medical condition or other relevant information when taking out the policy
  • Suicide within the first two years of the policy
  • If the policy has lapsed due to non-payment
  • Being murdered by a beneficiary
  • Dying while committing a crime

What Happens If You Outlive Your Policy?

Generally, nothing happens if you outlive your policy. Your insurance carrier notifies you that the policy is no longer in effect, and you stop paying the premiums, as there is no longer any potential death benefit. However, there are two exceptions.

If your policy had a return-of-premium rider, you will receive a check for the amount paid into the policy throughout its term. You may also convert your term life insurance policy into a whole life or universal life insurance policy before it expires.

How To Buy Term Life Insurance?

Assuming you’ve settled on a term policy, the first step to shopping is to settle on the death benefit you want the policy to deliver.

According to Gastwirth, an insurance strategist who works for American Business, you should purchase a term life policy that’s worth between 10 and 15 times your annual income. As of 2020, the Bureau of Labor Statistics reported that the average full-time worker in the US earned a weekly salary of $984 (approximately $51,168 a year).

The average working American will then need between $477,880 and $716,820 worth of coverage. However, the amount of coverage is rarely that specific, so you’ll most likely end up purchasing a policy that’s between $500,000 and $1,000,000.

Is Term Life Insurance Right for You?

If you’re getting married, starting a family, or buying a house, you should be considering some type of life insurance. And your policy should be in effect as long as your family will depend 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.

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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 It can only be converted to a permanent policy with the same insurer from which you purchased the policy

How Much Life Insurance Do You 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
  • your company-sponsored health insurance
  • 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 need financial protection. Some experts recommend purchasing from 10 to 12 times your annual income in life insurance coverage, but this calculation doesn’t consider inflation.

Term vs Whole Life Insurance

Here’s how term life insurance stacks up against whole life insurance, a leading form of permanent insurance:

Term Life Insurance Whole Life Insurance
Single-purpose product that provides a death benefit with an expiration date Offers a guaranteed death benefit, as well as a savings or investment component
Protects for a limited time — from 1 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 but has no cash value Premiums are high, but cash value may be used as retirement income or to cover premium payments

How Can You Lower Your Premiums?

Life insurance premiums are primarily determined by a client’s age and health condition. Older individuals and those with preexisting health conditions are considered a higher risk, so they can expect higher premiums. There are other several factors that insurers also use to determine your 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. However, they can increase your premiums by as much as 10% to 30%.

To get the lowest premiums, try to get insured younger — so long as it’s practical. Avoid smoking and avoid frequently engaging in dangerous activities, such as free climbing and skydiving. Lastly, make sure that you don’t purchase more insurance than you need; only get riders if they offer to converge that you consider essential.

How Can You Choose the Right Insurer?

Choosing the right life insurance provider comes down to understanding what you need from a policy.

✓ Look for established companies with a history of financial strength.

✓ Compare deals specifically for term life insurance between insurers.

✓ Choose three to five insurance companies that catch your eye.

✓ Consider rates once you have their final offers (after the underwriting process).

✓ Read the policies offered to you thoroughly and ask any questions you may have about your coverage.

Consult a Financial Professional Before Making Any Decisions

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 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 fits your budget and your family’s financial needs.

FAQs

What is term life insurance?

Term life insurance is a type of limited life insurance product meant to protect against financial instability due to the passing of the insured person. Term life policies guarantee a payment to the beneficiaries chosen by the covered person during a specified term that may last from 1 to 30 years, or up to a given age limit.

How does term life insurance work?

Term life insurance establishes a death benefit or payout which is disbursed if the insured individual passes away within a predetermined period of time. The payout is received by one or more beneficiaries selected by the policyholder.

What is the difference between term and whole life insurance?

Term life insurance has an expiration date whereas whole life insurance lasts for the rest of your life, so long as its premiums are paid. Term life is simple to understand and more affordable, but has no cash value.

What is group term life insurance?

Group term life insurance is designed to cover an entire group of people, such as workers at the same company. Employers often offer this type of term life insurance as part of an employee benefits package. Group life insurance is relatively inexpensive compared to individual life insurance, and policyholders may also purchase supplemental coverage to fill any gaps in their policy.

Can I get term life insurance without a medical exam?

One term life insurance option that doesn’t require a medical exam is simplified issue insurance, a type of no-exam life 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.

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. In other words, death benefit payouts are tax-free. 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 and give 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?

Beneficiaries should contact the insurer as soon as possible after the death of the insured. States usually 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.

Summary of Money’s Guide to Term Life Insurance

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 offers death benefits at lower premiums when compared to permanent life insurance.

See Money’s Best Life Insurance Companies of 2021 to read our recommendations for term life insurance companies and get life insurance quotes.

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