What Is Term Life Insurance? A Complete Guide

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Life is priceless, but death can be expensive. Especially if you have loved ones depending on you. 

If you have dependents, you may want to protect them from the financial fallout of a sudden loss of income or unexpected funeral expenses. That’s where life insurance comes in. A term life insurance policy can help your spouse pay off your mortgage or pay for your child’s educational costs in case you aren’t around to see those financial obligations through. 

“If you have someone who is dependent on your income to live, you should have term life insurance,” says Jeremy Schneider, founder of Personal Finance Club, a financial literacy company. Here’s what you need to know about how term life insurance works, how much it costs, and how to buy the right policy for your needs. 

What Is Term Life Insurance?

Term life insurance protects your family for a specific period of time, typically between 5 and 30 years. It’s intended to cover your financial obligations during a time when your family still relies on your income. For example, if you’re still paying off your mortgage or other debts, or if your family needs your income to cover their necessary expenses, term life insurance can give your family the resources to take over your financial responsibilities. 

For example, let’s say you still have $200,000 in mortgage debt that you won’t have paid off for another ten years. Your spouse may only be able to cover half of the mortgage payments with their income. A 10-year, $100,000 life insurance policy would help your spouse handle that obligation should you die during the term. Although, experts typically suggest purchasing policies that can cover at least 10 times your annual take-home pay. 

How Does Term Life Insurance Work?

When you apply for a term life insurance policy, you’ll choose the term (how long the policy will last) and the death benefit (how much your family will receive if you die). Those factors, along with your age and health status, will determine your premium. Your premium is the amount you’ll pay at regular intervals to maintain coverage. 

Pro Tip

You may be able to save money on term life insurance by laddering more than one policy. For example, you might buy a 20-year policy plus a 10-year policy to add extra coverage initially.

There are two types of term life insurance: level term and decreasing term. Level term, which is the most common type, means that the death benefit stays constant for the duration of the policy. With decreasing term life insurance, the death benefit drops at fixed intervals over the course of the policy.

In an ideal world, the beneficiaries would probably prefer that their loved one does not pass away. But like any type of insurance, term life insurance is meant to provide a financial safety net in the case of unexpected events. By paying your life insurance premium now, you’re giving your beneficiaries peace of mind that, should you die prematurely, they will be financially supported. 

“You pay a premium every year and that premium basically allows you to transfer the risk of a premature death to an insurance company,” says Jill Schlesinger, a Certified Financial Planner and business analyst for CBS News. 

If you outlive that term, you won’t get your premiums back, nor will your family receive a death benefit.  But you can choose to extend the term at that point, let it expire, or convert it to permanent life insurance. 

Term Life vs Whole Life Insurance

For the majority of people, financial experts we spoke to recommend term life insurance as opposed to whole, or permanent, life insurance. “Generally speaking, permanent life insurance is more complicated and far more costly than the term alternative, and for most people, they really only need life insurance for a particular period of time,” Schlesinger says. 

Type of Life InsuranceCoverageFixed PremiumsCash Value Eligible for Dividends
Term Life5-30 YearsYesNoNo
Whole LifeLifetime coverageYesYesYes

Pros and cons: Both types of life insurance ultimately give you peace of mind that your beneficiaries will be taken care of should you pass away. However, there are specific benefits and drawbacks to term insurance.

Cost: Term life insurance typically costs less than whole (or permanent) life insurance. That could leave additional room in your budget each month to invest more money into a brokerage account or retirement account. So long as you designate your family or whomever you’d like as a beneficiary of those accounts, they should receive any funds if you were to die unexpectedly. 

Schneider is particularly a fan of this strategy. “If you die before the term is up, you’re covered. If you don’t, your investment will have grown to much more than the whole life insurance would have provided,” he says. “Untimely death or not, you’re better off buying term and investing the rest.”

Coverage length: While term life insurance covers you for a particular period, whole life insurance lasts for your entire life and has a guaranteed death benefit. A whole life insurance policy also accumulates cash value, and some providers pay dividends to policyholders. 

Some people may need permanent life insurance to fulfill a specific need.  For example, you may require coverage for your entire life for estate purposes or you may have a special needs child or a much younger spouse. In those cases, whole life insurance might make sense, adds Schlesinger. 

Who Qualifies for Term Life Insurance?

  • Age: Every term life insurance provider has different requirements. You’ll typically need to be at least 18 years old, but the minimum age varies by company. If you’re older, you may not be able to buy as long of a term as a young person. 
  • Citizenship: Some providers will require you to prove you are a U.S. citizen, while others will require a social security number and a visa or green card. 
  • Health status: You’ll be asked health questions on your application, and some providers will deny coverage to people with certain health conditions. You may also be required to take a medical exam to get coverage, depending on the policy. 
  • Occupation and hobbies: Some providers may deny you coverage if you use marijuana, go skydiving, or even work in certain dangerous professions. 
  • Criminal and driving record: You may not qualify for life insurance if you have a criminal record or a lot of traffic violations, but it depends on the provider.
  • Financial standing: Your life insurance provider may check your credit and ask for proof of income if you’re purchasing a larger policy. 

How Much Does Term Life Cost?

While life insurance premiums can vary dramatically according to your age and the face value of the policy, “for people under 40, you’ll likely see quotes in the $20-$50 [per month] range,” says Schneider. Based on data from S&P Global Market Intelligence, healthy applicants looking for $250,000 worth of term coverage received the following rates on average:

AgeAverage female quoteAverage male quote
25$18.59/month$22.67/month
30$19.79/month$23.49/month
35$22.95/month$25.72/month
40$29.63/month$34.74/month
45$41.75/month$51.42/month
50$60.68/month$81.23/month

In general, whole life insurance costs significantly more than a comparable term life policy. You can also expect to pay more for term life insurance if you’re a smoker or have health conditions that make you a greater risk to insure. 

How to Apply for Term Life Insurance

  1. Determine how much you need: Schlesinger says you can use online life insurance calculators to figure out how much term life insurance coverage you need. A general rule of thumb, however, is to take your annual income and multiply it by 10.
  2. Get quotes:  It’s good practice to compare and shop policies online. There are plenty of quote comparison sites you can use, or you can get direct quotes from individual providers. “A good place to start to look for term life insurance is the company you already use to buy auto or homeowners insurance as there may be a reduction in price for buying the bundle,” says Schneider. You could ask an insurance broker or financial planner to help you shop policies, but be sure to ask if they receive commissions for their work — that could skew their advice. 
  3. Complete the application: You may be asked additional health questions when completing the official application. 
  4. Schedule a medical exam (if required): Some term life insurance providers require a medical exam. If you’re healthy, you may be able to get a lower rate with a medical exam than with simplified issue term life insurance. 
  5. Get approved: The underwriting process could take a few weeks, or you may be able to get instant term life insurance from some providers. 
  6. Pay your first premium: After you pay your premium, set up automatic payments to ensure the policy stays in force. 

Term Life Insurance Companies

State Farm

State Farm has an A++ (Superior) financial strength rating from AM Best and was the top-ranked life insurance provider in J.D. Power’s 2020 U.S. Life Insurance Study. However, the company doesn’t offer any life insurance discounts. You can get a quote online for some policies, but you’ll need to speak with an agent about higher face values. A 35 year-old, healthy female would pay $16.74/month for a 10-year policy with $250,000 worth of coverage. In addition to term life insurance, State Farm offers whole and universal life insurance, and there are plenty of available riders to customize your policy. 

GEICO

GEICO has an A++ (Superior) financial stability rating from AM Best but is not ranked by J.D. Power in the 2020 U.S. Life Insurance Study. That’s because GEICO doesn’t sell or underwrite life insurance, but instead partners with LifeQuotes.com to direct customers to other life insurance companies. For example, when NextAdvisor pulled a quote for a healthy, 35-year-old female seeking a 10-year, $250,000 policy, LifeQuotes.com returned a quote from Transamerica for $9.03/month. 

Progressive

Progressive offers term, whole, universal life, and final expense insurance with face values ranging from $5,000 to $1 million. You can get a quote instantly online for term life insurance. A healthy, 35-year-old female seeking a 10-year, $250,000 life insurance policy would pay about $16.53/month for coverage. Progressive isn’t rated by J.D. Power in the 2020 U.S. Life Insurance Study. The company has an A+ (Superior) financial strength rating from AM Best.