What is Term Life Insurance?

Here’s the quick answer:

Term life insurance is an insurance policy that gives your family—or any other beneficiary—money if you die within a specified timeframe (known as a term). Term life policies are typically the least expensive, least complicated type of life insurance you can buy, making them an easy way to protect your loved ones if the worst were to happen.

What are the types of term life insurance?

There are various flavors of term life insurance, but you’ll most commonly find either “level” or “non-level” term policies.

Level term life insurance

This is the most common type of term life insurance out there. “Level” refers to your premiums, which don’t change throughout the life of the policy—they remain “level” as long as the policy is in effect. The death benefit typically remains the same as well.

Non-level term life insurance

This is a blanket statement referring to any type of term insurance—of which there are several—where you pay either different premiums or receive a decreasing or increasing death benefit over the life of the policy.

  • Annual renewable term life insurance is a policy that you can renew every year. Annual renewable term policies can be inexpensive at first, but each year you renew the policy, the cost will rise, as premiums are based on your age at the time of renewal. There are also renewable term policies that renew less frequently, like two-year or five-year renewable term, so the premiums remain constant until you renew coverage two or five years down the line.
  • Decreasing term life insurance is a type of policy where the death benefit decreases over time, although premiums generally stay the same. Decreasing term policies are designed to cover debts that also tend to decrease over time, such as a mortgage. Appropriately, this product is sometimes called mortgage life insurance.
  • Increasing term life insurance is the opposite of decreasing term, where the death benefit increases after specified increments. Note that the increased death benefit requires increased premiums. Note that increasing term policies are rarer than decreasing or annual renewable policies.

What is group term life insurance?

Group term life insurance is another general category for term life insurance—in this instance, however, the insurance company offers term life policies through an organization to members of that organization. For example, an employer might sponsor annual renewable term life insurance for its employees. Typically, this kind of group policy is provided gratis by an employer through a benefits package, with the option to add coverage for more money.

How does term life insurance work?

When applying for a term life policy, you’ll typically start with filling out the application. You’ll select the details of your policy—term length, death benefit, additional riders, for example. Then, you may be required to take a medical exam (but not always). As long as you pay your premiums, your policy will remain in effect.

Term length & coverage (death benefit)

For any term life insurance policy, you need to decide the length of the term. Commonly, term lengths are 10, 20, or 30 years, but you may be able to get any amount of time on a policy you want with certain companies.

You also choose a death benefit amount, such as $100,000, $500,000, maybe even $1 million or more. Of course, the more coverage and longer term length you choose, the higher your premiums will be comparatively.

How do I determine a term length?

How do you determine a term length? You take a well-thought-out, educated guess. At the very least, you want to make sure your kids, spouse, or other dependents can get by in the event of your death. Many people buy a policy that lasts until the kids are likely to be out of the house.

If your spouse depends on your income, you might get a term length that lasts until you anticipate having enough to self-insure or until retirement. If you have a mortgage, you may get a term length that lasts until your home is paid off. Read more in-depth about how to choose a term life insurance policy.

Riders

You may also add riders onto your policy. A rider grants extra benefits or alters benefits in the policy (typically for higher premiums). For example, the return of premium rider gives some cash back to the policyholder if the insured person outlives their term. Commonly seen on term policies is a conversion rider, which gives the insured the option to convert their term life policy into another life policy upon its expiration, possibly without a medical exam.

There are countless riders, enough to merit an article of its own. The point is, you can usually modify and customize your policy to your liking.

Medical exam

During the application process for a term life insurance policy, you may take a medical exam. Some companies require you to take an exam (including bloodwork), others don’t. In general, if you’re relatively healthy, taking a medical exam may lower your premiums. So, if you can get through your fear of needles, your checkbook may thank you down the road! But if you faint at the sight of blood, you can always look into no exam life insurance.

What comes next

Once you’ve done everything above and the insurer issues the policy, you pay your premiums. If you continue to pay your premiums and you die within the term length you chose, your beneficiaries (the person/people you specified the money would go to) get a lump sum of money—the death benefit.

However, in most cases, the insured outlives their policy. At this point, if they added the conversion rider, they have the option to take out another policy (sometimes without a medical exam). Or, if they have the return of premium rider, they’ll get some of their money back.

Unless explicitly stated, however, you don’t get any money back if you outlive your term life insurance policy.

How much is term life insurance?

The cost of term life insurance depends on a few factors—like your health, age, gender, term length, death benefit, and optional riders you add to your policy. In general, the younger and healthier you are, the lower your premiums tend to be. Here are a few sample rates to give you an idea:

Term life insurance quotes for a healthy 25-year-old

Death benefit payout Monthly male premium Monthly female premium
$100,000 $9 $8
$250,000 $13 $11
$500,000 $19 $17
$1M $32 $27

Sample quotes based on data from a TermLife2Go partner and are for illustration purposes only. Sample rates are monthly premiums. Actual quotes may vary. Data effective 7/12/19.

Term life insurance quotes for a healthy 50-year-old

Death benefit payout Monthly male premium Monthly female premium
$100,000 $22 $18
$250,000 $40 $31
$500,000 $73 $55
$1M $134 $100

Sample quotes based on data from a TermLife2Go partner and are for illustration purposes only. Sample rates are monthly premiums. Actual quotes may vary. Data effective 7/12/19.

But if you want to know how much a term life insurance policy would cost for you, the best way is to get a quote.

Is term life insurance taxable?

Although there are exceptions, the death benefit of a life insurance policy is generally tax-free.

How do I determine a death benefit (or payout)?

Consider any debts (like a mortgage), annual expenses for your dependents, or even college costs that you may not be around to fund. Take into account any final expenses you may have. Think about how much your spouse or significant other may need in your absence. Add all that up, and you should have a decent idea of how big your term life policy should be.

Alternately, you could use our simple calculator to see how much you may need, or speak to a licensed agent for help.

I need a term life insurance policy. Where do I buy it from?

Vetting a company to buy life insurance from can be time consuming. Lucky for you, we already reviewed the best companies for term life insurance.

Alternatively, you could check out some of our individual reviews of life insurance companies and see which one you like best.

What is term life insurance good for?

Term life insurance is a great choice for a lot of people. It’s the most affordable, least complicated life insurance you can find. Term life is generally the best bang for your buck—giving the coverage you need, during the time you need it most, for the people who would be impacted the greatest by your loss:

  • Parents with children
  • Couples with a mortgage
  • Caretakers of a dependent (such as an elderly parent, special-needs adult, etc.)
  • Family with debts
  • Business owners/partners
  • Anyone with a short-term life insurance need

…And that’s just to name a few. But while term life insurance is a great option for a lot of people, it’s not for everybody. Term life insurance is limited by nature, and the limits are especially apparent for people who want more out of their life insurance.

For example, since most people are likely to outlive their term life policy, it’s not great if you want your policy to leave an inheritance to your children. It doesn’t have a savings account that accumulates interest over time from which you can borrow. It doesn’t provide coverage for your entire lifetime. For all three of those benefits, you’d need to get permanent life insurance. To compare and see what might be best for you, see Term vs. Whole Life Insurance.

Or, if you know term is the right choice for you, see our calculator and get a quote.

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