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A term life insurance policy stays in effect for a set period, commonly 10, 20, or 30 years. If you die while the policy is in effect, your policy beneficiaries receive a payment called a “death benefit.”
When you buy a term life policy, you choose the term length and death benefit amount, and designate your beneficiaries. The longer the policy term and higher the death benefit, the more the policy costs.
Shopping for life insurance? You’re not alone
39% of Americans—a record high—say they intend to buy life insurance in the coming year, according to the 2023 Insurance Barometer Study published by the Life Insurance Marketing and Research Association (LIMRA). The percentages are even higher for Gen Z adults and millennials.
If you’re among these shoppers, chances are you’re taking a long look at many policy options and are considering term life insurance.
How does term life insurance work?
Unlike a permanent life insurance policy, which is designed to stay in effect until your death, a term life insurance policy is in effect only for a set period. Typical terms are 10, 20, or 30 years, though some insurers offer shorter or longer-term policies.
When you buy a term life insurance policy, you make three important decisions:
- The length of the term. This choice is based on the options provided by your insurance company and your personal needs.
- Death benefit amount. This is the money the insurer will pay to your beneficiaries if you die while the policy is active.
- The beneficiaries. These are the people who receive the death benefit. Your beneficiaries might include your spouse and children, business partners, or others who depend on you financially.
If the insurance company approves your term life insurance policy application and starts your coverage, you’ll get charged an annual premium. This premium is based partly on your amount of death benefit and length of term: Choosing a higher death benefit and longer term means you have more coverage, which results in a higher premium. The premium is also based on additional factors, such as your age, health history, and whether or not you smoke.
To keep the policy in force, you should continue to make the annual premium payment to the insurance company. The insurer may cancel the policy if you fail to keep up with these payments. If you want to cancel the policy, contact the insurer. However, don’t expect to get refunded premium payments.
Once the term ends, the policy expires. Some insurers might offer to extend the term or convert the policy into a permanent life insurance policy that stays in effect until your death.
How the death benefit is paid
If you die before the end of the term, your beneficiaries can file a claim with the insurance company to receive your death benefit. The insurer may ask the beneficiaries to complete some paperwork and provide a copy of your death certificate. Once the insurer approves the claim, it may issue the death benefit payment as cash or annuities.
A death benefit is often intended for significant financial needs, such as paying off a mortgage, or other debts, or funding children’s education. However, the beneficiaries can use the death benefit any way they see fit.
Key features of term life insurance
Key features of a typical term life policy include:
The policy is in effect for a term you specify when you buy the policy. Options typically include 10, 15, 20, 25, or 30 years. Some policies can even stretch to 40 years.
The premium typically remains constant through the life of the policy, making it easy to account for in a budget.
Guaranteed death benefit
You specify a death benefit amount when you buy the policy. If all the conditions of the policy contract are met, your beneficiaries are typically guaranteed to receive this amount.
No cash value
Unlike permanent life insurance, term life lacks a cash value component. We explain what this means later in the article.
How to choose your term
A shorter term, such as 10 years, might be a good option for older buyers without a mortgage or dependents to support. Such a policy could provide funds for end-of-life expenses such as a funeral and burial.
A longer term, such as 20 or 30 years, might be ideal for those looking to provide financial security to their family. Such a policy could help pay off debts, such as a mortgage, or fund children’s higher education.
How to choose a life insurance coverage amount
Ideally, you choose a death benefit that ensures your beneficiaries will be financially secure in your absence. Here are some common “rule of thumb” methods for calculating a suitable amount.
10X income formula
The 10X income formula is perhaps the simplest way to determine your life insurance needs. It’s calculated as follows:
- Multiply your income by 10.
- Add at least $100,000 per child to cover the cost of college.
The DIME formula requires you to carefully consider your debts, income, mortgage payments, and education costs for each child. Add these figures to arrive at an adequate death benefit amount.
Life insurance calculator
Online tools, such as calculators offered by Ladder Life Insurance, can help you figure out a suitable death benefit amount. You’ll need to key in information such as age, health, income, and family details.
Types of term life insurance
There are multiple variations of term life insurance, with some providing the option to modify the key features described earlier in the article.
A level-term policy has a set term, premium, and death benefit. This is the most straightforward type of term life insurance.
An increasing term policy offers the option to increase the death benefit over time, with a corresponding premium increase.
A convertible term policy can be converted to a permanent life insurance policy, such as a whole or universal life policy, before its expiration.
A decreasing term policy offers the option to lower the death benefit as time passes, with a corresponding decrease in premium.
An annual-renewable term policy provides year-to-year coverage. As each year ends, you have the option to renew coverage for the following year. This flexibility comes at a cost as these types of policies are typically more expensive than a policy with a multi-year term.
Term life insurance pros and cons
When shopping for term life insurance, you should understand the pros and cons.
|Term life pros||Term life cons|
Simpler and easier to understand than a permanent life insurance policy
Coverage ends at the conclusion of the term
Cheaper than a permanent life insurance policy
Coverage limitations for older applicants
Stable premium and death benefit
No cash value component
Death benefit is typically tax-free
Term life vs. permanent life insurance
Term life and permanent life are two of the main types of life insurance.
Both enable you to choose your death benefit amount and designate beneficiaries. A key difference is coverage time. A term life policy is effective for a specified term, whereas a permanent life policy stays in force until your death.
Permanent life insurance policies also include a cash-value feature. Cash value is a savings component that lets part of the premium you pay earn interest as long as the policy remains in force. You typically can access this money through a loan or withdrawal. However, the insurer may deduct any outstanding loan balance from the amount of death benefit your beneficiaries receive.
These extra benefits mean a permanent life policy is generally much more expensive than a term life policy.
The average cost of term life insurance
A recent study by USNews.com examined the average monthly cost of a policy with a $1 million death benefit for a non-smoking policyholder with average health. We’ve included the cost of term life and two types of permanent life insurance for comparison purposes. The ages are from policy inception.
Where to buy term life insurance
The most convenient and usually fastest way to get a life insurance quote is directly from the insurer. The following companies all offer term life insurance quotes on their websites.
|Company||Policies offered||A.M. Best Rating|
Available terms of 10, 15, 20, 25, 30, 35 years. Up to $10 million in coverage.
Available terms of 10, 15, 20, 30 years. Up to $2 million in coverage.
Available terms of 10, 15, 20, 25, 30 years. Up to $8 million in coverage.
Available terms of 10, 30 years. Up to $5 million in coverage.
*These ratings were given to the companies that underwrite Ladder and Fabric’s term life insurance policies.
RELATED: Best Life Insurance Companies
Another option is to check with an online insurance broker such as Everyday Life. As a broker, Everyday Life offers term life insurance from multiple companies, making it easy to shop around and get a policy that works for your budget.
Considering the importance of life insurance for your family’s financial security, you alternatively might consider getting help from an independent insurance agent who specializes in life insurance or an independent financial advisor. These professionals can take time to discuss your options and help you buy a policy that gives your family the financial security it needs.
Time STAMP: Term life is the simplest and purest form of life insurance
A term life insurance policy provides coverage for a set period. If you pass away within that stretch of time, the policy will pay a death benefit to beneficiaries of your choosing. As more Americans shop for life insurance in 2023, many will no doubt discover that a term life insurance policy meets their needs.
Frequently asked questions (FAQs)
How much term life insurance do I need?
There are multiple ways to estimate how much term life insurance you should buy. The simplest method is to multiply your annual income by 10, then add $100,000 per child to cover education costs.
What can I expect when I apply for term life insurance?
When you apply for term life insurance, you’ll fill out an application that will gather important information about you and your family. Some policies may also require a medical exam to determine your overall health.
How long does term life insurance last?
A term life insurance policy lasts for a set term—typically 10, 20, or 30 years. You choose this term when you buy the policy. Provided you make your premium payments on time and don’t otherwise request a policy cancellation, your policy should remain in effect until the end of the term.
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