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What is term life insurance?

Fact-checked with HomeInsurance.com

Life insurance is an important way to financially protect your family when you are gone. When it comes to choosing a life insurance policy, you will be faced with the choice of whole life insurance or term life insurance. That may leave you questioning; “What is the difference? Which one is best for me?” 

To help you through this important decision, let’s talk about term life insurance and when it may (or may not) be the right choice for you. 

What is term life insurance?

Instead of a life insurance policy that covers your life indefinitely, known as a whole life insurance policy, term life insurance covers you for a term or a period of time. If you pass away before the term is up, your beneficiaries will receive the death benefit promised by your term life insurance policy. Term life insurance policies are sold at a lower cost than whole life insurance policies for the simple reason that they offer coverage that is limited to a certain period of time.  

Unlike whole or universal life insurance, term life insurance does not offer tax benefits or cash-value build up. This type of insurance is for people who need to have life insurance, but can’t afford to pay high premiums. In order to find out if the term life insurance is the best policy for you, consider these factors as a starting point:

  • You’re still young and in good health
  • You’re looking for a straightforward, simple, and low-cost insurance policy to protect your beneficiaries
  • You can’t afford other expensive life insurance premiums

Term life insurance pros and cons

Pros Cons
Lower cost than other life insuranceNo cash-value offered
Allows you to pay for a period of time and then reassess your needs to avoid paying for coverage you don’t needOffers only temporary coverage
Can cover your family’s financial needs if you pass awayHave to requalify at the end of each term which can be difficult if there are health issues
Can be converted to whole life insurance at the end of a term

Types of term life insurance

The most common types of term life insurance are mortgage, renewable, annual, and level. 

Level term 

This type of policy requires payment of a fixed period for the duration of the term insurance policy. Common terms include 35, 30, 25, 20, 15, 10, and 5 years. A person usually buys a level term life insurance policy for asset management and long-term planning because premiums do not increase or decrease which allows for long-term budgeting.

Renewable or convertible

Some policies are renewable or convertible at the end of the term. When the term insurance is with guaranteed renewal, the insurer promises that it will issue another policy whether or not the policyholder is insurable or not. Although most insurance companies do not offer guaranteed renewal, they opt to offer a conversion option that permits the policyholder to convert the policy to a permanent life insurance policy which will induce the policyholder to pay higher insurance premiums. When buying term insurance, you need to know about these options prior to buying a term insurance policy.

Annual renewable term

This variation of term life insurance is a one-year life insurance policy wherein the insurer guarantees issuance of a policy which is at least the same amount as the original policy regardless of the policyholder’s insurability. The premium can vary depending on the policyholder’s age.

Mortgage life insurance

This insurance typically has a constant premium, but the face value of the policy is declining because this type of policy is drawn to equal the mortgage amount of the policyholder’s property. With this kind of term insurance, the insurer will pay for the mortgage in the event of the policyholder’s death.

How much does a term life insurance policy cost?

The cost of a term life insurance policies is based on several things, including but not limited to:

  • Age
  • Gender
  • Health conditions
  • Lifestyle
  • Coverage amount
  • Term
  • Riders

Average cost of term life insurance by age and gender ($250,000, 10-year term)

Age Monthly cost female Monthly cost male

Term life insurance riders

Insurance riders are add-ons or supplemental coverage you can add to your term life insurance policy. While not required, these are a few options for those who may need a bit more than the standard term life insurance policy offers. 

  • Accelerated death benefit rider – in the unlikely event you are diagnosed with a terminal illness with 12 to 24 months to live, this rider pays out your death benefit. Essentially, this rider lets you access your death benefits while you are still living to help cover the costs of your medical care. 
  • Return of premium rider – This rider returns 100% of your premium, tax-free if you are still living at the end of your term life insurance period. 
  • Term conversion rider – though some term life insurance policies come with this automatically, for others you may need a term conversion rider if you may want to convert your term policy to a whole life policy at the end of your term or during the conversion period established in your term policy. 

How much term life insurance do I need?

There are many myths surrounding when and how much life insurance is necessary. Determining how much term life insurance coverage you need does not need to be complicated. Here are some tips to make it easy:

  • Research funeral or end-of-life expenses – if you pass away, what are your end-of-life wishes? Be sure to have a legal will in place to ease the decision-making burden for your family. Additionally, calculate an approximate estimation of what your end-of-life wishes will cost and note this amount. 
  • Outstanding debt – next, make a list of all your outstanding debts. This might include things like mortgages, car loans or anything else your beneficiaries may be left responsible for when you’re gone. 
  • Dependent costs – do you have dependents? If so, how much will it cost your spouse or another guardian to care for those dependents throughout their dependency? You should also consider things like college expenses. Add this amount to your tally. 
  • Extra support – in addition to the other amounts, consider if  you want to leave your family a financial cushion for extra support. This is an amount beyond what will be necessary to cover other obligations and can be used by your beneficiaries for things you may have not planned for or just as an inheritance. Add this to your running total.

The cumulative estimate of these calculations gives you a general idea of the amount of term life insurance coverage you will need. Use your insurance agent as a guide to help you think through other things you may have not considered. 

Term life insurance vs. whole life insurance

Term life insurance is uncomplicated and the lowest initial cost of other life insurance options. Whole life insurance provides coverage throughout your life and also allows you to borrow or withdraw funds over time as needed. However, whole life policies generally come at a higher premium cost. So, which is right for you?

If you are seeking affordable coverage and would rather invest the savings on a cheaper premium in other ways, a term life policy may be a good choice. This is particularly true for individuals who seek coverage only to pay off things with a specific end date, like a mortgage payoff. A term life policy may also be good for someone whose budget does not allow for the premium of a whole life policy. 

If you have a larger estate or a lifelong dependent who will need paid care after you’re gone, a whole life policy may be right for you. You also may be eligible to earn dividends on a whole life policy, depending on your insurance provider. 

What are the best companies for term life insurance policies?

Insurance company Why we chose them
Haven LifeA++ rating from AM Best
Easy online quote and application
Owned by MassMutual, who has been in business since 1851 
Northwestern MutualA++ rating from AM Best
Highest overall customer satisfaction in J.D. Power 2019 U.S. Life Insurance Study
Offers a term to age 80
State FarmA++ rating from AM Best
100% return of premium 20 and 30-year policy options
Guardian LifeA++ rating from AM Best
Wide range of insurance types and coverages

How to buy a term life insurance policy

If you’ve assessed your options and have decided a term life insurance policy is the right choice for you and it’s now time to buy your policy. 

  • Start by requesting quotes from at least three insurance companies. Be sure they’re all quoting the same coverage limits and terms so you can compare equivalent quotes. 
  • Review the company’s financial strength on AM Best
  • Review the company’s reputation on J.D. Power and Associates and the National Association of Insurance Commissioners
  • Ask for references from friends and family. 
  • Once you’ve made your decision, contact the insurance company and they will send over the policy for your review. Once you have signed and agreed to the policy, your insurance agent will take the necessary steps to enroll you immediately to activate the policy.  

The takeaway

  • Life insurance is a critical part of financial and estate planning. 
  • The younger and more healthy you are, the cheaper a rate you can secure.
  • Term life insurance is effective for a specific period of time. 
  • Term life insurance has low-cost premiums. 
  • Term life insurance policies can be purchased through a large number of reputable insurance companies. 

It is common to think that the younger you are, the less you need life insurance. But from a financial risk perspective, statistics show that people are in the most debt between the ages of 35 and 54. More debt means more financial burden for your beneficiaries in the event you die unexpectedly. 

Purchasing life insurance at a younger age is a wise financial choice because it will not only be cheaper but will cover you at the time of your life when you have the highest debt. 

Term life insurance allows you to get the coverage you need at a low cost, during a specific period of time, and then reassess your life situation at the end of that term. It is up to you to determine what life insurance policy best meets your and your family’s needs, so speak with a licensed agent to find out what they recommend for you.

Ashlee Tilford

Ashlee is an MBA business professional by day and a dynamic freelance writer by night. Covering industries like banking, finance, and health & wellness, her work has been published on sites like bankrate.com, thesimpledollar.com, interest.com, womens-health.com and more. Ashlee specializes in personal finance and is passionate about helping others achieve greater financial freedom.

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