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What Is Term Life Insurance?

Term life insurance is a type of life insurance policy that provides coverage for a specified term or period, usually between 10 to 30 years. If the policyholder dies during the term, the death benefit is paid out to the beneficiaries tax-free.

If the term ends and the policyholder is still alive, the policy expires, and no benefit is paid out unless the policy is renewed or converted to a permanent policy. It is generally more affordable than permanent life insurance and is designed to provide financial protection for your loved ones in the event of your early death.

Life Insurance Coverage as Part of Financial Planning 

Having life insurance can boost your sense of security. According to recent studies, 68% percent of households with life insurance say they’d be financially secure if the primary wage earner unexpectedly passed away. Only 47% without life insurance say they’d be financially secure in the same situation.

For this reason, 90 million Americans have life insurance products and purchased $3.3 trillion in new life insurance coverage in 2021. Most buy individual life insurance policies, purchasing an average “face value” of $190,000 in insurance to cover expenses. Life insurance proceeds can achieve several goals: 

  • Pay for the deceased’s funeral and burial  
  • Repay loans, including car or home loans 
  • Make up the difference in breadwinner income
  • Help advance family long term goals such as education or retirement
  • Pay estate taxes or estate settlement costs

How Does Term Life Insurance Work? 

Life insurance pays your beneficiaries a cash amount (called a “death benefit”) if you pass away. A term life insurance policy lasts for a specific period (or “term”), such as 5, 10, or 30 years. 

During this period, you pay a monthly premium based on various factors. The monthly premium may be deducted from your bank account (if you have an individual plan) or your paycheck (if you have a group term life insurance plan).  

The insurance company pays the death benefit if you pass away during the term. The company does not pay the benefit if you pass away after the term finishes. 

Key Features of Term Life Insurance 

  • Term life insurance allows you to choose the term (length of time) and amount (amount paid to your survivors or beneficiaries)
  • Term life insurance pays out the value upon your death
  • You may need to undergo medical or written health exams to be approved
  • The insurance company only pays a death benefit if you die within the term’s span
  • Most people purchase level term insurance, where both premiums and death benefits remain the same over the term’s span
  • Term life insurance can provide you with the most cost-effective form of coverage

Coverage Lengths 

Term life insurance only lasts for the coverage period you purchase, usually 10, 20, or 30 years, with some policies allowing you to renew a policy term. Ideally, if you increase your savings and other assets as you age, you don’t need to renew or worry about insurance payouts when the term expires. 

Death Benefit Payout 

Term life insurance payouts work much like other types of insurance you’re familiar with, such as auto or homeowners insurance. You pay a monthly premium and receive money from the insurance company only if an unfortunate event occurs. The death benefit is not guaranteed. You are paying for protection in a worst-case scenario.  

In this case, the worst case scenario event would be your death. If you die, the company pays a death benefit (or the face value of your policy) to your survivors named as beneficiaries in your term life insurance policy. 

Rider Options 

A rider is an optional coverage you can add to your existing term life insurance plan. You’ll pay extra for the rider and end up with a higher premium but a more customized coverage solution. 

  • Waiver of premium rider: A rider that allows you to keep the policy in force until a specified age, even if you can’t pay premiums. Typically, if you become permanently disabled, the rider kicks in. This is the most popular rider type selected by insureds.
  • Return of premium rider: This rider allows you to get a return of all the premiums you’ve paid when the policy expires. The premium may be high as a result. 
  • Child rider: A child rider can provide insurance coverage for your children, typically under the age of 21–25. The amount of insurance you can buy is relatively low, such as $20,000. 
  • Accidental death benefit rider: This ensures an extra payout if you die due to an accident, and may also pay smaller amounts if you’re injured in an accident. 
  • Living benefits rider: This rider allows you to use some of your death benefits while still alive, typically after being diagnosed with a terminal illness.
  • Convertible policy rider: This rider allows you to convert your term policy to a permanent policy as long as you do so by a specified age. 

Outliving the Policy

If you outlive your term life policy, your survivors may not receive any death benefit. Term life policies only cover a death that occurs during the term. For example, if you have a 25-year term that does not renew and die in year 26, there will be no death benefit payout. Outliving your term life policy may indicate that your overall strategy was successful. Your term life policy should serve as extra protection as you build savings and assets over your life. 

Renewing the Policy

In some cases, you can renew your term life insurance policy. However, the policy must be specified as renewable from the outset. When you renew your policy, you usually won’t undergo further medical testing, but you’ll likely pay more as you age. 

Types of Term Life Insurance

Death Benefit
Level Term Life Insurance
Fixed amount
Fixed amount
Decreasing Term Life Insurance
Fixed amount
Decreases over time
Annual Renewable Term Life Insurance
Increase with each annual renewal
Return of Premium Term Life Insurance
Fixed, but higher than level term life insurance
Fixed but can also include return of premiums paid
Group Term Life Insurance

Level Term Life Insurance 

The most popular term type available, level term life insurance, keeps your premiums set at the same level over the entire term. The death benefit payout also stays the same. Level term life insurance can help those interested in keeping pricing consistent over a long period, even if you do not need the insurance’s benefit as much in later years. 

Decreasing Term Life Insurance

Decreasing term life insurance tends to have lower death benefits as the term progresses. So, your beneficiaries might receive less in year 15 than in year 5. This approach can make sense if you’re building wealth over the years. 

Typically, the premiums remain the same for the entire term, h In contrast, an increasing term life insurance policy will increase the payout and premiums over the term’s span. This could be a fit for someone concerned about being unable to save for an unexpected death while aging. 

Annual Renewable Term Life Insurance 

Annual renewable term life insurance was once a popular term type; essentially, you’d renew your term every year. Today, level term policies for a decade or more are standard. With a renewable policy, you may pay more upon renewal based on your age, but you don’t necessarily need to undergo a physical exam. Getting a new life insurance policy might require that exam. Now, renewable plans may offer longer terms, such as ten years.

Return of Premium Term Life Insurance

The typical term life insurance policy pays a monthly premium in exchange for the insurance contract. If you die during the term, the policy pays a death benefit. With a return of premium policy, the insurer returns your premiums paid if you don’t pass away by the term’s end. However, you usually can’t drop the insurance before the term ends, or you forfeit your returns.

Group Term Life Insurance 

Life insurance is widely offered by employers and is available to 57 percent of private industry workers. The employees make up the group insured. Group term life insurance typically offers very inexpensive premiums, often just a few cents on dollars, deducted from your paycheck. You may be able to choose a smaller, fixed amount of coverage or an amount based on your annual salary (such as 2 to 5 times your annual salary). 

Term Life Insurance vs. Permanent Life Insurance 

Term Life
Permanent Life
Coverage Length
Set terms that expire, typically 10-30 years
Premium Cost
When the term ends for continued coverage
None needed
Death Benefit
Not guaranteed; payout if the policyholder dies during active term
Cash Value
Best For
People with temporary needs
Some people

Unlike term insurance, permanent or whole life insurance is designed to last your entire life, with a guaranteed death benefit. Permanent builds a cash value account that you can borrow against (but must pay interest on the loan), made up from a portion of your premiums. 

Permanent may be a good option for those who want to save money for retirement or are concerned about not having life insurance into the twilight years. Term may be better for the average person who plans to build assets outside of a life insurance policy or only needs insurance for a limited amount of time.

Converting Your Term Life Policy Into Permanent Life Insurance

If you have a convertible policy, you can exchange your term policy for a permanent life policy. You can make the exchange without taking a medical exam or health questionnaire. As you age or develop health conditions, this conversion can be helpful as you may not qualify for a new policy. 

However, converting your term policy into permanent life insurance will increase your monthly premiums, as a portion is put aside for the savings plan. You cannot convert whenever you want; typically, you must do so before age 65. Speaking with a tax advisor or financial planner before converting a policy is essential to ensure you understand the long-term outcomes.

How Much Does a Term Life Insurance Policy Cost? 

Term life insurance can cost between $25-$155 per month for a $500,000 term life policy for a 35-year-old woman without any health conditions. Premiums increase for longer terms, providing insurance for higher-risk middle and older individuals.

For 35-year-old males, the premiums are initially similar, starting at around $30 per month. For longer terms of up to 35 years (or age 70), male premiums can be as high as $225+. However, whole life premiums can rapidly reach $900 or more per month. 

Factors That Affect Your Term Life Premium 

  • Type of term life policy: The type of term life policy you choose can lead to a higher or lower premium. For example, a return of premium policy will probably be more expensive than a level term life policy. 
  • Term length: Longer terms (such as 20-30 year terms) will charge higher monthly premiums, as the policies continue to cover you even as your risks increase. 
  • Coverage amount: Higher coverage amounts will likely cost morebut could provide more financial support if your expenses or debts are high or you’re the sole breadwinner. You can choose to calculate coverage by ten times your annual salary or drill down into total costs with DIME (debt, income, mortgage, education). Use DIME by adding up all debts, annual income, mortgage, and total education costs to find the insurance coverage you need.
  • Your age: Life insurance premiums will start at a higher amount if you’re an older insurance buyer. For example, you’ll pay significantly higher premiums for a new life insurance policy at 50 than a person getting insurance at 20. 
  • Medical underwriting results: Every insurance company has underwriters who assess you for chronic health problems and recent higher-risk health behaviors. For example, you will likely pay higher premiums if you smoke, drink, or have preexisting health conditions such as cancer, diabetes, sleep apnea, or depression.
  • Your occupation and hobbies: If you participate in certain high-risk hobbies (such as rock climbing or scuba diving) or careers (primarily pilot and aircraft crew), you may pay more for insurance every month. 
  • Your credit history: The insurance company may investigate your credit history for any serious issues. If you have credit problems, such as a recent bankruptcy, the insurer may decline to offer you a policy or charge you far higher rates.
  • Policy endorsements or riders: Adding extra coverage, such as a rider to cover your child or an accident, will increase the premium amount. 

Benefits and Drawbacks of Term Life Insurance

  • Affordability
  • Simplicity
  • Flexibility
  • Temporary coverage
  • Financial planning tool
  • No cash value
  • Renewals needed
  • Limited coverage period
  • Death benefit not guaranteed
  • Underwriting necessary

Term life insurance can be a good fit for most consumers. But it’s wise to consider the pros and cons before submitting your application or paying your premium. 

Benefits of Term Life Insurance 

  • Affordability: Term life insurance can be one of the most inexpensive ways to buy large coverage amounts for an unexpected death, particularly if you’re young. Group term life insurance policies can be particularly cost-effective. 
  • Simplicity: Your premiums, death benefits, and term length are simple, straightforward, and easy to understand. This simplicity can make shopping around for rates and comparing policies easier. 
  • Flexibility: Your beneficiaries can use the term life insurance death benefits however they need to. In addition, you can invest savings by choosing an affordable term plan and investing in assets that will grow.  
  • Temporary coverage: Term life insurance is designed to only cover you until a certain age, after which you’ve hopefully built up other assets. 
  • Financial planning tool: Term life insurance coverage can be a critical element of estate planning and building with proper guidance. 

Drawbacks of Term Life Insurance 

  • No cash value: A term life insurance policy doesn’t build cash value, which can be important for some people who have a hard time saving money otherwise. 
  • Renewals needed: You’ll need to renew coverage to keep the policy in effect. Your premiums could increase at renewal; after a certain age, you may be unable to renew a term policy. 
  • Limited coverage period: Term life insurance typically won’t cover you after a certain age and is not designed to last your entire life.
  • Death benefit not guaranteed: The policy will only pay a death benefit if you die during the term; after that, there is no payout. 
  • Underwriting necessary: Depending on the insurer and policy, you must pass a physical exam or medical questionnaire to qualify for term life insurance. 

Who Should Consider Term Life Insurance? 

Term life insurance can offer good protection for many people, particularly the following groups:

  • Younger individuals, including young families: Term life insurance can be a cost-effective way to ensure a family is provided for if a family breadwinner passes away. Term life insurance is also lower cost to purchase when you’re young and allows you to lock in decades of pricing if you purchase a level term life insurance plan.  
  • Those with debts: If you have debts like a mortgage, term life insurance can help pay down or pay off the debts. Term life insurance can also pay off shared debts your partner or spouse must pay if you pass away. 
  • Those with temporary financial obligations: A term life insurance policy can provide funds to ensure enough money for short term financial obligations such as paying for preschool or college.
  • Those seeking supplemental coverage: Group term life policies from your employer can help round out any other coverage and boost your death benefit with additional amounts. 
  • Those who want extra lifetime protection: Some term policies offer early access to the death benefit if an accelerated death benefit rider was purchased. You may also find a term policy with special riders for hospital, cancer, critical illness, disability, intensive care, or a private-duty nurse.  

How to Get Term Life Insurance

Thankfully, understanding term life insurance and getting a policy in place are both fairly easy to accomplish. But there are a few steps to ensure you get a solid plan from a financially secure, stable company. 

  1. Assess your financial needs and goals: Consider who an insurance policy’s death benefit would go to and what needs you hope it meets. How much do you need to feel secure? You might meet with a financial planner or advisor to help consider any tax or other implications. 
  2. Compare your term life insurance type options: Familiarize yourself with your options for a term policy, such as term length and face value. 
  3. Evaluate potential insurance companies: Review different companies’ financial strength ratings, complaints, and history of customer service through online research and contacting your state’s insurance department. 
  4. Consult with a trusted agent: Once you think you know which type of policy you want, get advice from the company’s insurance agent, but first, make sure the agent is licensed in your state. 
  5. Select your preferred policy and apply: Decide which policy you want and apply. The process may take several weeks to complete, depending on the type of insurance.  
  6. Undergo medical underwriting and receive your results: Depending on the amount, company, and state, you may be asked to provide your health history or get a physical. The results will help establish your premiums. 
  7. Pay your first premium and receive proof of coverage: Pay your first month’s premium and receive proof of coverage in the mail. 

What This Means For You 

Term life insurance can offer you a significant policy amount for a lower monthly premium and is flexible enough to be adjusted for your needs. You can easily fine tune a term life insurance policy for the term, total benefit amount, conversion to a permanent insurance policy, or add riders for extra protection. You can even have multiple term policies comprising your individual term plan and group insurance term plans offered by your workplace.

If you think that term life insurance may be right for you and your family, make sure to speak with a trusted financial advisor or insurance agent to learn more.

Frequently Asked Questions 

Typically, a death benefit is not considered income, so your beneficiaries will likely not pay income or inheritance taxes on the benefit received. However, in some situations, term life insurance proceeds are taxable, such as where interest is concerned. You can use an IRS survey tool to see if the term life proceeds are taxable. 

If you outlive your term life policy, your policy expires, and no benefit is paid out unless the policy is renewed or converted to a permanent policy. However, if you have a return-of-premium rider or policy, you may receive some or all of your premiums paid back.

You can generally renew your term life insurance policy once it expires, though you may need to undergo a new medical underwriting assessment that results in higher premiums.

Plan for your family’s future. Get a life insurance quote today.

Get a quote

Plan for your family’s future. Get a life insurance quote today.

Get a quote