Guide to Term Life Insurance — and How It Works
Term life insurance offers straightforward coverage for a set period of time.
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Written byBen Luthi
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Ben Luthi
Ben Luthi has been writing about personal finance for over a decade with the intent to help people improve their finances and lifestyle. He’s covered just about every personal finance topic under the sun for a variety of publications, including the Wall Street Journal, Fortune Recommends, Yahoo Finance, Experian, Credit Karma, NerdWallet, and many more. Ben lives near Salt Lake City with his two kids and two cats.
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Edited bySara Getman
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Sara Getman is an Associate Editor at Insurify and has been with the company since 2022. Prior to joining Insurify, Sara completed her undergraduate degree in English Literature at Simmons University in Boston. At Simmons, she was the Editor-in-Chief for Sidelines Magazine (a literary and art publication), and wrote creative non-fiction.
Outside of work, Sara is an avid reader, and loves rock climbing, yoga, and crocheting.
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Table of contents
A term life insurance policy offers a death benefit for a predetermined period of time. Compared to permanent life insurance, such as whole or universal life, term life offers simplicity and more affordable premiums. But its lack of certain features could be a significant drawback for some people.
As you consider your life insurance options, here’s what you need to know about the different types of term life insurance, how much it costs, the pros and cons of term coverage, and how to buy a policy.
Quick Facts
Term life insurance offers coverage for a set period, typically ranging from one to 30 years.
Insurers offer several different types of term life coverage.
While a term policy is less expensive than whole life insurance, it lacks lifetime coverage and a cash value component.
What is term life insurance?
Term life insurance offers temporary coverage in the event that you pass away during your policy’s term. While a 20-year term is the most popular, benefit terms typically range from as little as one year to 30 years. In some cases, insurers may even offer up to 40 years.
When setting up a term life policy, you’ll name one or more beneficiaries. You’ll then pay monthly premiums to maintain your coverage until the end of your term.
If you do pass away, your beneficiaries will receive a death benefit payout, which they can use how they wish. Possible uses for life insurance proceeds include funeral expenses, medical bills, debt payoff, income replacement, and educational expenses.[1] [2]
Compared to other forms of life insurance, term life can be attractive due to its straightforward features and affordability.
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Types of term life insurance to consider
Insurance companies offer a handful of different types of term life insurance. Understanding how each one works can help you make an informed decision about which one is the right fit for you:[2]
Level term: The most common form of term life insurance, it offers a level premium and death benefit for the duration of your policy.
Decreasing term: With this type of policy, your death benefit decreases over time. It may be beneficial if you anticipate that your loved ones will need less financial support over time or if you want a policy to pay off a specific debt, such as a mortgage loan.
Convertible term: This type allows you to convert your term life coverage to a permanent life policy without needing to undergo another medical exam. Premiums will increase, but it may be helpful if your needs change and you want lifetime coverage.
Renewable term: These short-term policies typically last one to five years but are renewable, even if your health changes. You can typically expect a premium increase each time the policy is renewed.
Return of premium: If you outlive your term life policy, this type of coverage will refund your premium payments. But premiums tend to be much higher compared to other types of term coverage.
Cost of term life insurance
Term life insurance is popular because it’s more affordable than permanent life insurance policies. But several factors can influence what you pay for a policy, including the following:[3]
Age
Younger people have a longer life expectancy and therefore can expect to pay lower rates.
Gender
Women have a longer life expectancy than men, so they tend to pay less.
Desired coverage
The more coverage you want for your loved ones, the higher your premiums will be.
Benefit period
Longer terms are more likely to pay out, so they’re generally more expensive.
Health
You’ll typically need to answer some questions about your health and family history and also undergo a medical exam. If you have certain health conditions, you may need to pay a higher premium. If you have a serious medical issue, such as a terminal illness, you may be denied outright.
Tobacco use
If you use tobacco, you can generally expect to pay more for coverage.
Lifestyle and occupation
Engaging in high-risk hobbies, such as skydiving or rock climbing, or working in a dangerous career field, could result in higher premiums.
Type of policy
Some types of term life insurance may cost more than others.
To give you an idea of what you might pay for term life coverage, here are some average rates based on age, gender, and common term lengths.
Age/Gender ▲▼ | Term ▲▼ | Monthly Premium for $250,000 Policy ▲▼ | Monthly Premium for $1 Million Policy ▲▼ |
|---|---|---|---|
| 25-year-old woman | 30 years | $14 | $35 |
| 25-year-old man | 30 years | $17 | $46 |
| 45-year-old woman | 20 years | $21 | $66 |
| 45-year-old man | 20 years | $26 | $84 |
| 55-year-old woman | 10 years | $28 | $90 |
| 55-year-old man | 10 years | $37 | $121 |
Insurify partner SelectQuote provided these averages based on 20-year and 30-year term policies from one or more of the companies SelectQuote represents. Rates are for men and women in excellent health. Premiums may vary depending on individual health, issuing company, and other factors.
When buying term life insurance, it’s crucial that you shop around and compare quotes from multiple insurance companies to ensure you get the best rates available to you.
Pros and cons of term life insurance
As with any financial product, it’s important to consider both the advantages and disadvantages of term life insurance before buying a policy to ensure it’s the best fit for your situation and needs. Here are some pros and cons to keep in mind.
Pros
Relatively affordable
Simple features
Flexible coverage periods
Can include renewability and conversion options
Cons
Coverage is temporary
No cash value component
Potential for premium increases upon renewal
Limited customization
How to buy term life insurance
If you’ve determined that term life insurance is right for you, here are some steps you can take to purchase a policy:[4]
Decide how much you need. You may use a rule of thumb, such as 10 times your salary, or you can use a needs-based approach and estimate your need based on projected expenses.
Pick a term length. Think about how long you want to maintain coverage.
Comparison shop. Take your time to shop around and compare quotes from multiple insurers.
Complete an application. Once you choose an insurance company, you’ll need to provide some personal information, desired death benefit and term, and other details to apply.
Complete a medical exam. In addition to answering health questions, you’ll typically also need to undergo a medical exam, which may include taking your vitals, measuring your height and weight, and taking a blood and urine sample.
Review and finalize your policy. If you’re approved, the insurer will provide you with policy documents that lay out your premiums, coverage, term, and other features. Read through the documents carefully before signing them.
Set up payment for your policy. Using one of the insurer’s preferred payment methods, set up automatic payments to ensure that you don’t lose your coverage.
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Term life insurance vs. whole life insurance
One alternative to term life insurance is whole life. As you consider your needs, it’s important to compare how the two options differ. Here’s a quick comparison to help you get started.
Feature ▲▼ | Term Life ▲▼ | Whole Life ▲▼ |
|---|---|---|
| Coverage duration | 1–40 years | Lifetime |
| Premiums | Lower | Higher |
| Cash value | No | Yes |
| Purpose | Protection for a set period of time | Lifetime protection, savings growth with cash value |
| Medical exam | Typically required | Some may not require |
Term life insurance FAQs
As you consider whether term life insurance is right for you, check out the additional information below to help you make your decision.
Which is better, term life or whole life insurance?
Neither option is inherently better than the other, so it’s important to understand your needs and evaluate your budget to determine which one is the right fit for you.
What’s the main disadvantage of term life insurance?
Term coverage is temporary, and while you can potentially renew a policy after it expires, that might not be an option if you develop a medical condition that results in significantly higher premiums or denial.
Can you cash out term life insurance?
No. Term life insurance doesn’t have a cash value component, so there’s no way to cash out a policy when canceling it.
How do you determine how much life insurance to buy?
Some experts offer rules of thumb you can use, such as 10 times your salary. Alternatively, you can use a needs-based approach and get coverage based on anticipated needs upon your death.
Do you get your money back at the end of a term life insurance policy?
It’s possible. You may get your premiums refunded at the end of your policy’s period if you opt for a return of premium policy. But this type of coverage tends to be much more expensive than a level term policy.
Sources
- III. "What are the principal types of life insurance?."
- III. "What are the different types of term life insurance policies?."
- Western & Southern Financial Group. "9 Factors That Could Affect the Cost of Life Insurance."
- III. "How much life insurance do I need?."
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Ben Luthi
Ben Luthi has been writing about personal finance for over a decade with the intent to help people improve their finances and lifestyle. He’s covered just about every personal finance topic under the sun for a variety of publications, including the Wall Street Journal, Fortune Recommends, Yahoo Finance, Experian, Credit Karma, NerdWallet, and many more. Ben lives near Salt Lake City with his two kids and two cats.
Sara Getman is an Associate Editor at Insurify and has been with the company since 2022. Prior to joining Insurify, Sara completed her undergraduate degree in English Literature at Simmons University in Boston. At Simmons, she was the Editor-in-Chief for Sidelines Magazine (a literary and art publication), and wrote creative non-fiction.
Outside of work, Sara is an avid reader, and loves rock climbing, yoga, and crocheting.
