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Published: Apr 27, 2023 16 min read

Term Life Insurance

Definition

Term life insurance is a type of life insurance policy that provides coverage for a specific timeframe or term. Terms can span anywhere between 10 and 40 years, depending on the insurance company. In contrast to whole life insurance, where the coverage is intended to last the insured's entire life, term life insurance may reach its end within the insured's lifetime. This is because these policies are meant to provide coverage for a predetermined period, such as the span of a mortgage. Furthermore, term life insurance does not include a cash value element the way whole life does. Compared to its whole life counterpart, term life premiums are usually more affordable.

Also known as:pure life insurance

Read on to understand how term life insurance works, who it’s for and how to get it, or check out our guide to the best life insurance companies for more options.

Table of Contents

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How does term life insurance work?

Term life works as a time-limited safety net. If you were to die within the term the policy is active, the insurance company would pay out a death benefit to your beneficiaries. If, on the other hand, you outlived the policy, the coverage would expire and the death benefit would not be paid out.

Pros and cons of term life insurance

Pros
  • Cheaper premiums than permanent life insurance
  • Many policies include the option to convert to permanent life insurance
  • Coverage you can tailor to your needs
Cons
  • The policy expires upon reaching its term
  • No cash value, unlike many whole life policies
  • Health issues can affect your ability to convert or renew your policy

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 or denied.

These include, but are not limited to:

  • Failing to disclose a medical condition or other relevant information when taking out the policy
  • Not paying the premium
  • A beneficiary being found guilty of causing the death of a policyholder
  • Dying while committing a crime

What happens if you outlive your policy?

At the end of your policy term, the insurance carrier notifies you that the policy is no longer in effect, and you stop paying the premiums.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 all or some of what you paid in premiums (depending on the terms of the rider).
  • If your policy has a conversion rider, you may also convert your term life insurance into a permanent life insurance policy before the term coverage expires.

How soon can beneficiaries claim a death benefit?

Beneficiaries should contact the insurance company as soon as possible after the death of the insured.

States usually allow insurance companies 30 days to review the claim, approve or deny it or ask for additional information.

For many families, this might mean covering funeral costs out of pocket and then waiting for reimbursement from the insurance company.

Types of term life insurance

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

1. Level term insurance

With a level term insurance policy, both the monthly premiums and the death benefit remain the same for the entirety of the term. There is also level premium insurance, a policy that maintains the same premium payments but increases coverage.

2. Decreasing term life

Decreasing term policies are usually cheaper to buy upfront than level term life insurance policies. However, even though the premiums stay the same, the death benefit decreases every year.

This policy is typically taken out by people who have financial commitments that decrease over time, like a mortgage. If you were to die at the start of the term, your dependents would get a higher payout than at the end of the term — at which point the policy payout would be down to zero.

3. Renewable term

If your family has a history of medical conditions, then a renewable term policy may be an excellent option to explore. With a renewable term policy, you can extend your coverage before the original term expires without undergoing a medical exam. However, premiums are assessed annually and usually go up as you age.

4. Convertible term

A convertible term life policy can be converted into a universal or whole life insurance policy when the term expires. Premiums for this type of policy are higher than for level term life insurance.

Read more about converting your term policy to whole life to see if this policy is right for you.

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Term life insurance eligibility

When you buy a new policy, the insurer must first establish your eligibility for coverage. They may ask for details such as:

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

Note that, if you develop a terminal illness or severe chronic disease while covered by your policy, and would like to increase the coverage for your policy, you probably won't be able to do so unless you have a guaranteed insurability rider. These riders give policyholders the option to renew their policy or increase their death benefit without showing proof of insurability by undergoing a medical test.

Similarly, getting a term life policy later in life could be more difficult and cost a lot more. If you're over the age of 65, consider life insurance options for seniors.

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.

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 much does term life insurance cost?

Since term life insurance policies cover you for a limited period instead of your entire life, premiums can be much more affordable than permanent life insurance. Examples of permanent coverage include whole life insurance and universal life insurance.

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. (For this example, the policy amount (death benefit) is $500,000 for a 30-year term.)

What affects your term life insurance premiums?

Life insurance premiums are primarily determined by the policyholder's age and health. Therefore, younger individuals without preexisting health conditions are considered lower risk and qualify for the lowest premiums.

The opposite is also true, you should expect higher premiums as you age and develop health conditions. Note, however, there are ways you can pay less for life insurance.

Other factors that insurers also use to determine your term life insurance premiums include:

Coverage and term

Your premiums will also depend on the amount of coverage you purchase. The larger the death benefit, the higher your premiums. Longer terms also cost more.

Risky habits

Habits that may increase your risk of dying or developing an illness — , such as smoking or using tobacco products — will increase your premiums. Forgoing risky habits can help you keep premiums low.

If you have a healthy lifestyle, several insurance companies now offer life insurance fitness rewards and discounts if you provide them with information about your eating and exercise regime.

Riders

Insurance riders are add-ons that a policyholder can buy to obtain benefits their policy does not include. Some riders may 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 before the end of its term.

However, riders can increase your premiums by as much as 10% to 30%.

For example, a guaranteed insurability rider, which allows you to increase coverage at a later date, may not make sense if you have a short-term life policy.

Underwriting process

Underwriting is part of an insurance company’s risk assessment process. In the case of life insurance, underwriting includes an evaluation of the individual's overall health.

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, etc.

Duration of coverage and cost

Term life insurance coverage typically lasts for a specific period of time and is priced accordingly. That makes term life a fitting and affordable option for those who need coverage for, say, the duration of their mortgage or need to purchase a substantial death benefit.

Term life insurance premiums are charged monthly over the duration of the term. Once the life insurance term ends, it can either be renewed or allowed to lapse.

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

How to buy term life insurance

If you’ve made the decision to buy term life insurance, the first step is to determine the duration of coverage and the death benefit amount you want your beneficiaries to receive.

The most popular term life insurance option is 20 years. Its popularity comes from its affordable premiums for an optimal amount of time. However, your policy term should depend on how long your dependents will need financial protection from the loss of your income. For example, you may opt for a term life policy that covers you for the duration of your mortgage.

When deciding on a life insurance coverage amount, however, the Insurance Information Institute recommends the following:

1. Calculate how much coverage you need

Calculate how much your loved ones would need to cover your debts and replace your income and for how long.

What resources would your dependents need if you die?

If you’re purchasing term life as a form of income replacement for your family members, the death benefit should reflect the amount your beneficiaries would need to cover living expenses and other financial responsibilities after your death.

When calculating your insurance needs, factor in:

  • Your debts and financial obligations
  • Funeral expenses
  • Company-sponsored benefits such as health insurance
  • Services you provide your family (childcare, tax preparation, etc.)

What other sources of income could your dependents have access to?

After you've calculated how much money your loved ones would need to replace your income and cover debts, deduct other sources of income they may have access to after your death, such as Social Security benefits. This should help you avoid overpaying for life insurance.

Once you have determined how much annual income your dependents would actually need, multiply that amount by the number of years they would require financial protection.

2. Consider adding riders to your policy

The Insurance Information Institute recommends looking into a waiver of premium rider, which pays your premium if you become disabled. Another rider to consider is the return of premium rider, which refunds the premiums you've paid toward the policy at the end of the term.

3. Compare quotes

The final step to buying term life insurance is to compare rate quotes. The general recommendation is to compare at least three quotes from different companies for the same type and level of coverage to find the most affordable option.

Once you've chosen an affordable policy from a reputable company, you can buy life insurance online or over the phone directly with the insurer or broker.

How to choose a term life insurance company

While conventional wisdom says the thing to consider when choosing a provider is cost, there are several other factors you should look into as well.

  • Products and riders - A provider could offer the term you want at an affordable price, but may not have other products or riders you may need in the future. Because you can only convert your policy with the same provider, choosing a provider with a broad range of products will give you flexibility in the future.

The same goes for riders. For example, a guaranteed insurability rider gives you the option of renewing or purchasing additional insurance without taking another medical exam.

  • Company name and financial stability - Check out the company to learn if it has a parent company or another insurer underwriting its policies. Then, research the company’s A.M. Best, Moody’s and Standard & Poors ratings. This will give you a sense of its financial stability and continued ability to pay out claims.
  • Customer satisfaction and claims - Research what past customers have to say about the provider. Make sure to check the customer satisfaction and claims record of the company from reputable sources like the Better Business Bureau (BBB), the National Association of Insurance Commissioners (NAIC) and consumer review websites to see how the provider fared with consumers.

Before choosing a provider, check our selections for the best life insurance companies.

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Term vs. whole life insurance

When shopping around for life insurance, you’ll eventually have to weigh whether term or whole life insurance is best for your needs. Both types offer a guaranteed death benefit, but they vary in several factors such as cost of premium, coverage length and features available.

Read our comparison of term vs whole life insurance to learn more about the differences between them.

 

Term Life Insurance Whole Life Insurance
A single-purpose product that provides a guaranteed death benefit for a fixed period of time. In addition to the guaranteed death benefit, it also provides 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 to supplement retirement income or to cover premium payments
Premiums can increase at the end of the term if the customer wants to renew the policy Premiums won’t change

Term Life Insurance FAQ

What is term life insurance and how does it work?

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Term life insurance is a type of life insurance product meant to temporarily protect against financial instability due to the insured person's death.

Term life policies guarantee payment to the beneficiaries chosen by the insured person if that person dies within a specified period of time or "term." Terms may range from one to 30 years or up to a given age limit.

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 more affordable but has no cash value, whereas whole life insurance does not expire and invests part of your premium — in other words, this type of policy could yield dividends. However, this investment component makes it more costly.

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, whereas whole life insurance does not expire and has an investment component, which makes it more costly.

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.

If you leave your job, your policy will expire. In such a case, you would have to inquire about getting a policy through your next employer or purchasing one individually.

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 one person as beneficiaries or leave the proceeds to a trust, charity or estate.

There are also two levels of beneficiaries: primary and contingent. If your primary beneficiaries have died 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 report any interest you receive from a whole-life policy.

Summary of Money’s guide to term life insurance

  • Term life insurance is one of the most straightforward and accessible types of life insurance.
  • This type of policy is a great choice for anyone with dependents who has a temporary need for coverage.
  • 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.
  • Term life insurance offers a guaranteed death benefit and costs less when compared to permanent life insurance.

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

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