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By Ana Reina and Norma Rodríguez
November 30, 2021

Term life insurance is a type of life insurance coverage that expires after a set period or a “term.” Until its expiration date, the policy guarantees payment to a beneficiary (or beneficiaries) if the insured dies.

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.

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What is term life insurance?

Term life insurance policies consist of a death benefit and a fixed policy term.

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.

Policy terms typically range between five and 30 years, with the most popular option being 20-year terms. Some companies also offer one-year term policies—also called yearly-renewable term policies.

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. For example, a 40-year-old male with no conditions can expect to pay around $18 a month for a 15-year level term policy worth $250,000.

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.

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 large coverage amount.

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
Source: Policygenius

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
  • Lifestyle (whether you smoke, drink, have a high-risk job or practice extreme sports)

If you develop a terminal illness or severe chronic disease and want to increase the amount of coverage for your policy, you probably won't be able to do so unless you have a guaranteed insurability rider.

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.

How does term life insurance work?

Term life works as a short-term safety net. It can provide peace of mind and safeguard the financial security of your dependents, loved ones, and/or business as long as the policy is in effect.

If you were to die within the term of the policy, 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.

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.

Underwriting process

Underwriting is part of an insurance company’s risk assessment process to determine how likely it is that 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, etc.

What affects your 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.

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

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. 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.

Coverage amount and term length

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.

To pay less for life insurance, don't buy more coverage than what your family requires.

Riders

Insurance riders are add-ons that a policyholder can buy to obtain benefits their policy does not cover. 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%. Similar to the advice above, only opt for riders you need.

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

These include, but are not limited to :

  • 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?

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 what you paid into the policy throughout its term.
  • 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 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

If you’ve settled on term life insurance, the first step to buying a policy should be 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 the 20-year term. However, your policy term should depend on how long your dependents will need financial protection against 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 of capital 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

Again, add only the riders you truly need to enhance or tailor your coverage.

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 before purchasing coverage. 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.

Pros and cons of term life insurance

Pros
  • Cheaper premiums
  • Guaranteed death benefit
  • Many policies include the option to convert to permanent life insurance later on
  • An affordable option for younger families
Cons
  • The policy expires upon reaching its term
  • It has no cash value
  • Health issues can affect your ability to convert or renew your policy
  • It can only be converted to a permanent policy with the same insurer

Term vs. whole life insurance

Here’s how term life insurance stacks up against whole life insurance, the most popular type of permanent coverage:

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 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

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 companies with a history of financial strength
  • Compare term life insurance options from at least three insurers
  • 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 the best life insurance companies.

Consult a financial professional before making a decision

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 fit 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 life insurance product meant to temporarily protect against financial instability due to the passing of the insured person. 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.
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 goes to the beneficiary or 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, 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 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 report 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 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 of the year to read our recommendations for term life insurance companies and get life insurance quotes.