What Is Term Life Insurance and How Does It Work?

Miranda Marquit
Miranda Marquit Insurance Writer
  • Co-hosts the Money Talks News podcast

  • MBA from Utah State University

Miranda is a financial writer and avid podcaster with nearly two decades of experience contributing to major outlets, including Forbes, The Hill, and NPR.

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Ashley Cox
Edited byAshley Cox
Headshot of Managing Editor Ashley Cox
Ashley CoxManaging Editor
  • 7+ years in content creation and management

  • 5+ years in insurance and personal finance content

Ashley is a seasoned personal finance editor who’s produced a variety of digital content, including insurance, credit cards, mortgages, and consumer lending products.

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Updated January 24, 2023 | Reading time: 7 minutes

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Life insurance is one way to provide for your family in the event that you die. A good life insurance policy can help cover financial obligations for your family so that losing your income doesn’t financially devastate them.

Two main types of life insurance are available: term and permanent. This article will cover term life insurance coverage so you can determine whether it’s a good option for you and your family.

What is term life insurance?

Term life insurance is designed to last for a specific amount of time, usually between five and 30 years.[1] Once the term expires, you no longer have coverage. Many young families choose term life insurance plans because the premiums often cost less while providing financial protection if the main earner dies.

Depending on the situation, the family’s finances might have improved — and young children might have grown up — by the end of the term. As a result, a life insurance policy might no longer be necessary when the term expires.

Learn More: Do You Need Term Life Insurance?

How does term life insurance work?

Life insurance is designed to pay a benefit when the insured person dies. The covered person often contributes significantly to the family’s income. As a result, life insurance is designed to provide financial security.

The death benefit amount for a term life policy depends on how much coverage you purchase. Once you decide how much money your family would need if you pass away — including taking care of debt obligations, funeral expenses, child care, college tuition, and basic needs — you then need to decide how long the specific term of your policy should be.

Your monthly premium will be based on the number of years your policy lasts and how much the policy pays out as a death benefit. On top of that, the insurer might consider your health, and you might need to provide your medical history. As long as you remain up to date on your premiums, your family will be able to receive the policy’s death benefit if you pass away during the specified term of your policy.

Often, it makes sense to get some type of life insurance policy early on, just in case you have an illness later or experience some other factor that can make it difficult to get life insurance.

Important Information

If you pass away during the policy term, your family can submit the appropriate paperwork to the insurance company and receive the payout. It’s important to note that a life insurance death benefit is not considered taxable income.[2]

Read More: 13 of the Best Term Life Insurance Companies

Important term life terminology

As you consider insurance coverage, it’s a good idea to familiarize yourself with different types of term life insurance products and their features:

  • Level term: This is the most popular type of term life insurance. It means your guaranteed death benefit is the same throughout the policy term.

  • Decreasing term: With this type of term life insurance product, the death benefit reduces over time, usually each year.

  • Renewable term: At the end of a specified period, it’s possible to renew this policy for another term. There might be a limit on the number of additional terms, and you might pay more when you renew the policy. But it’s a way to renew term life insurance after the end of the initial term, often without needing another health check.

  • Return of premium: Generally, you don’t get a portion of your premium back, even if you’re still alive at the end of the term. But some life insurance companies offer a return of premium, which provides policyholders with a portion of their premium back if they haven’t filed a claim when the policy expires.[3]

  • Premium: This is the amount of money you pay at regular intervals (often monthly) to keep your policy active. With a level premium term life policy, these payments stay the same throughout the term.

  • Benefit: This is the amount of money paid to your beneficiaries upon your death.

  • Beneficiary: This is the person designated to receive the benefit if you die. You can have more than one beneficiary. Additionally, updating beneficiaries after life changes, like divorce and death, is a good idea.

  • Ratings: In some cases, you might pay an additional charge on top of your standard insurance premium. These ratings can result in higher rates because someone might have a hazardous job or another situation that could result in an earlier death.

  • Rider: This is a way to add an additional benefit to the life insurance policy.

  • Annuity products: Some types of life insurance products result in regular payments. A life insurance policy death benefit is sometimes paid out as an annual annuity rather than all at once.

Examples of term life insurance policies

When getting term life insurance, start by determining how much you think you’ll need to provide for your family if you pass on. For example, one recommendation is to get between 10 and 15 times your current income. So, if you make $35,000 per year, you might want to get between $350,000 and $525,000 in coverage.

Let’s say, however, that you want to provide for your family, pay off debts (including credit cards), and ensure that your children will get a good start after they graduate high school. In this case, you might choose to get more life insurance coverage. On the other hand, if you need a more affordable price or your partner has income, you might choose less coverage at a lower rate.

Carefully weigh your family situation and coverage needs, and consider talking with a financial advisor about what makes sense for you.

Term life vs. whole life insurance

While term life is a popular choice for life insurance, permanent life insurance is another option.

The main differences between these types of life insurance have to do with coverage periods, as well as the potential to build cash value and make withdrawals from the cash benefit of the policy. Variable universal life insurance, a type of permanent life insurance policy, lets you build up a cash value account and even take out loans against your cash value. But permanent life insurance tends to cost more than term life.

FeatureTerm LifePermanent Life
Expires after a set period of timeYesNo, it covers your entire life
Builds cash valueNoYes
Ability to borrow against the policyNoYes
Ability to receive money upon surrenderDepends: Some policies offer return of premiumsYes, depending on the surrender value
Need to renew after the end of a specific termYesNo

Read More: Term Life vs. Whole Life Insurance: What’s the Difference?

Can you convert your term life policy to a whole life policy?

If you start with a term policy and later want access to a whole life insurance policy, the good news is that some insurers allow you to convert a term policy to a permanent policy. In some cases, you might not need a new medical exam, even if you aren’t in good health.[4] You might even get the same coverage amount.

This move isn’t always right for everyone, though. Before you decide to convert your policy, consider how it might affect your finances:

  • Cost: Whole life often costs more than term life for the same coverage. Make sure that you can handle the new, higher premium and that it’s worth it.

  • Need for cash value: Review the policy terms and decide whether cash value is truly needed. While a cash account can be useful later if you need to make a loan to yourself, you might be better off with an emergency fund in a savings account.

  • Investment potential: Some companies tout universal life policies as a way to invest and reap higher returns on a day down the road. However, depending on the structure of the policy contract, the returns might not be as good as expected.

A permanent life policy can provide peace of mind and work well in some cases, but it’s important to understand the long-term consequences. Consider getting a second opinion from someone who isn’t your insurance agent to make sure converting your term life policy is the right move for your situation.

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Pros and cons of term life insurance

Before settling on a term life insurance policy, consider these pros and cons.

  • Get a higher amount of coverage at a lower cost

  • Affordable

  • Might be available with no medical exam

  • It doesn’t cover your entire life

  • You might not recover premiums if you live beyond the term

  • No investment or cash account options

Learn More: No-Medical-Exam Term Life Insurance the Easy Way

How term life insurance policies pay out

In general, term life policies pay out if the insured person dies within the specified policy term. Depending on the policy, you might receive a lump sum or have an annuity structure. With an annuity, you’ll receive regular structured payments rather than a one-time payout. Double-check the policy to understand how you might receive the payout.

If the insured person doesn’t pass away during the original term, they might have the option to renew their policy. But they may pay higher premiums.

How to find the best term life insurance policy

Before you choose a term life insurance policy, gathering information is a good idea. Consider your own needs, and list the features and benefits you prefer and how much life insurance you need.

Then, shop around for different options. Get quotes from three to five companies. You can also use an online marketplace to help you compare coverage choices. Look for a policy that has the coverage you need at a price you can afford. If you aren’t sure which policy is best for you, speak with a financial advisor or insurance agent.

Related Read: 10 Best & Worst Sites to Compare Life Insurance Quotes

Term life insurance FAQs

A life insurance policy can be important to your family’s financial strength. Here are some answers to common questions about term life insurance.

  • Do you get your money back at the end of a term life policy?

    In most cases, you don’t get your premiums back at the end of a policy. Some insurers offer special policies that return some of your money if you outlive your term. But these might have additional costs.

  • Can seniors get term life insurance?

    Some insurance companies offer term life to people above age 60. However, premiums might be higher. Most insurers won’t issue a policy to someone over 80.[4] Some whole life policies might be available, but it’s important to compare costs.

  • Which is better, term life or whole life?

    The type of life insurance policy that’s best for you depends on your circumstances and needs. You can get more bang for your coverage buck if you’re younger and choose a term life policy. However, you’re more likely to outlive the policy. Other people may like the idea of building cash value for later and choose a whole life policy instead. Additionally, some seniors might find that whole life annuity products meet their needs better.

  • What is the benefit of term life insurance?

    For the most part, the biggest benefit to a term life policy is the ability to get a relatively large amount of coverage at an affordable price. It offers peace of mind for those who are concerned about what their families would do if they died suddenly.

Compare Life Insurance Quotes Instantly

Secure. Free. Easy-to-use.
Based on 3,806+ reviews
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  1. Insurance Information Institute. "What are the principal types of life insurance?." Accessed January 19, 2023
  2. Internal Revenue Service. "Life Insurance & Disability Insurance Proceeds." Accessed January 19, 2023
  3. National Association of Insurance Commissioners. "Life Insurance." Accessed January 19, 2023
  4. Insurance Information Institute. "What are the different types of term life insurance policies?." Accessed January 19, 2023
Miranda Marquit
Miranda Marquit Insurance Writer

Miranda Marquit, MBA, is a freelance financial writer covering various markets and topics since 2006. She has contributed to numerous media outlets, including Forbes, TIME, The Hill, NPR, HuffPost, Yahoo! Money, and more. Her work has been syndicated by MSN Money, Marketwatch, Credit.com, and other publications. She has written about insurance topics for Clearsurance, HealthCare.com, and various other websites. She is also an avid podcaster and co-hosts the Money Talks News podcast. Miranda has a Master’s Degree in Journalism from Syracuse University. Connect with her on LinkedIn.

Ashley Cox
Edited byAshley CoxManaging Editor
Headshot of Managing Editor Ashley Cox
Ashley CoxManaging Editor
  • 7+ years in content creation and management

  • 5+ years in insurance and personal finance content

Ashley is a seasoned personal finance editor who’s produced a variety of digital content, including insurance, credit cards, mortgages, and consumer lending products.

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