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By Ana Reina and Norma Rodríguez
Updated: September 9, 2021 2:17 PM ET
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Money

Term life insurance is a type of life insurance coverage that expires after a specific period of time or a “term.” Until its expiration date, the policy guarantees payment to a beneficiary (or beneficiaries) if the insured dies. It is also a cheaper option than permanent life insurance for anyone looking to have peace of mind and protect their loved ones against unexpected financial expenses upon their death.

Read our guide on 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 policies consist mainly of a death benefit and a predefined term limit. The death benefit, also known as face amount or value, 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.

Types of term life insurance

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

  • Level term insurance – With this type of policy, both the monthly premiums and the death benefit remain the same for the term. There is also level premium insurance, a policy that maintains the same premium payments but increases coverage.
  • Decreasing term life – This policy is usually cheaper to acquire upfront than level term life insurance policies. However, even though the financial costs 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
  • Convertible term – This policy allows the insured to change your term life insurance to a universal or whole life insurance policy. Premiums are higher than for the level term policy

Duration of coverage

Term life insurance coverage typically lasts for a specific period, although some companies offer renewable policies annually. Once the life insurance term ends, you can then renew it or allow it to lapse. Another option is converting your term to whole life insurance.

Term length Average premium cost
10- year term $20.19
20-year term $28.97
30-year term $44.53

Source: Policygenius

Policygenius methodology: Average rates are based on a 35-year-old male non-smoker in Ohio with a Preferred health rating, buying a $500,000 term life policy, as of February 24, 2021. This calculation is a composite of the 11 carriers that offer policies through Policygenius, including AIG, Banner, Brighthouse, Lincoln, Mutual of Omaha, Pacific Life, Principal, Protective, Prudential, SBLI, and Transamerica.

Eligibility

For the insurer to determine your eligibility for coverage when buying a new policy, you’ll have to disclose details such as,

  • Age
  • Height
  • Gender
  • Employment information
  • Medical history
  • Lifestyle (whether you smoke, drink, have a high-risk job, or practice any extreme sports)

Suppose by the end of the term you develop a terminal illness or severe chronic disease. In that case, you may not be able to renew your policy unless you have a “guaranteed insurability” rider.

How Does Term Life Insurance Work?

Term life works as a short-term safety net. It can safeguard the financial security of your dependents, loved ones, and/or business.

How much does term life insurance cost?

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

Underwriting process

Underwriting is part of an insurance company’s risk assessment process to determine how likely you will die within the policy’s term limit. For medical underwriting, insurers examine,

  • Health and medical history
  • Lifestyle
  • Occupation
  • Income and financial status
  • Other factors that may affect life expectancy such as foreign travel, military, criminal history

How can you lower your premiums?

Life insurance premiums are primarily determined by a client’s age and health condition. Therefore, older individuals and those with preexisting health conditions are considered a higher risk and should expect a higher premium.

There are other 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.

Risky habits

Habits that may increase your risk of dying or developing an illness will increase your premiums, such as smoking or using tobacco products. Several insurance companies offer life insurance fitness rewards and discounts if you provide them with information about your eating and exercise regime.

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 are add-ons that a policyholder can buy to provide extra benefits which their policy does not cover. However, they can increase your premiums by as much as 10% to 30%. 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.

Don’t purchase more insurance than you need. To get the lowest premiums, try to get insured younger, avoid smoking and other dangerous activities. You can also research to buy online life insurance and compare prices between companies.

What can cause a claim denial

Although it's unusual for a life insurance company 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, your insurance carrier at the end of your policy term notifies you that the policy is no longer in effect, and you stop paying the premiums. However, there are two exceptions.

  • If your policy has 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 into a whole life policy or universal life insurance policy before the term coverage expires.

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.

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How To Buy Term Life Insurance?

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

When deciding on the amount you want your insurance to deliver, consider purchasing a term life policy that’s worth between 10 and 15 times your annual income. In the US, the average full-time worker makes approximately $51,168 a year, according to the Bureau of Labor Statistics. Therefore, the average working American will most likely end up purchasing a policy that’s between $500,000 and $1,000,000.

Pros and cons of term life insurance

Pros
  • Lower premiums
  • Easy to understand
  • Many policies include the option to convert to permanent life insurance later on
  • An affordable option for younger and/or less affluent families
Cons
  • The policy expires upon reaching the term
  • There is no cash value
  • Health issues can affect your ability to convert or renew your policy
  • It can only be converted to a permanent policy if you stay with the same insurer

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
A 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
The death benefit is tax-free The death benefit is tax-free, but the investment component is tax-deferred
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
At the end of the term, if the customer wants to renew, premiums can increase Premiums won’t change

How much life insurance do you need?

Term life insurance is an excellent option if you have dependents but not much disposable income to invest in a permanent life insurance policy.

Suppose you’re purchasing term life as a form of income replacement for you or your family members. In that case, 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.

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.

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.

Before choosing a provider, check our selections for Best Life Insurance for Seniors.

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.

Term Life Insurance FAQ
What is term life insurance?
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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 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?
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Term life insurance establishes a death benefit or payout disbursed if the insured individual passes away within a predetermined time. The payout is received by one or more beneficiaries selected by the policyholder.
What is the difference between term and whole life insurance?
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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?
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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.
Who can be a life insurance beneficiary?
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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.

Is the death benefit taxable?
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According to the IRS, death benefit payouts generally aren't considered gross income and don't have to be reported on your income tax return. In other words, death benefit payouts are tax-free. However, you should notify any interest you receive from the policy.

Summary of Money’s Guide to Term Life Insurance

Term life insurance is one of the most straightforward 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.

Suppose anyone depends on you financially, or you want to cover funeral expenses or debt after your death. In that case, 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.