What is term life insurance?

How to protect your loved ones financially if you die

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Life insurance is a policy designed to financially protect your loved ones in the event of your death. Insurance companies pay a set amount of money, called the death benefit, to a designated beneficiary or beneficiaries if the insured person dies while the policy is valid.

Term life insurance is just one of several types of life insurance available. It lasts for a specific period of time (called a term), which can range from one year to 30 years or more, depending on the insurer.  If you're considering term life insurance, there are some key things you should keep in mind to make sure it's the best policy for you and your family.


Key insights

Term life insurance is typically cheaper than permanent life insurance.

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Term life policies are temporary, whereas permanent life insurance lasts for the insured's lifetime.

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Term policies may be renewable once the initial term expires, but the new premium will be higher

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Some insurers allow conversion of term life policies to permanent coverage.

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What is term life insurance?

Term life insurance is a form of life insurance that lasts for a certain duration or term. Terms typically range from one to 30 years and are available in five-year increments (such as 10, 15 or 20 years), although some policies peg the term to an age limit instead, such as age 65. In most cases, term life insurance premiums are level, meaning they won’t increase while the policy is in effect.

Like other kinds of life insurance, a term life policy will pay a tax-free death benefit to the designated beneficiary or beneficiaries if the insured person dies while the policy is in effect. The beneficiary may be a spouse or other family member, a friend or acquaintance, or even an institution like a church or school.

The death benefit is guaranteed and can range from less than $10,000 to $1 million or more. However, the death benefit is paid only if the insured person dies while the policy term is in effect, provided the premium payments have been kept current. In most cases, the premium on a term life policy is level, meaning it will not increase while coverage is in effect.

Term life insurance is cheaper on average than whole or universal life insurance because term life is temporary and carries no cash value. At the conclusion of the term, policyholders may be able to convert their coverage to permanent life insurance or be allowed to renew coverage for a set period of years at a higher rate.

Term life insurance vs. whole life insurance

Term life insurance is temporary because it lasts for only a specific amount of time, such as 20 years. Once the term expires, the policy is no longer valid. Term life insurance premiums generally don’t increase over time, and the death benefit is guaranteed and tax-free for beneficiaries.

“This type of policy provides a safety net without the complexity or cost of cash value accumulation, embodying a pure and straightforward form of protection,” said Mark Whiffen, a licensed insurance agent in Panama City, Florida.

“It’s best suited for individuals in search of affordable, temporary coverage to protect specific financial responsibilities, such as a young family needing security until the children are independent or a homeowner covering a mortgage,” Whiffen added.

Whole life insurance, which is a form of permanent life insurance, lasts for the lifetime of the insured person. As with term life insurance, whole life insurance policies typically have level premiums and a guaranteed death benefit. Unlike term insurance, whole life policies also contain a savings element that builds cash value steadily over time. Policyholders can borrow against or withdraw from this fund, but non-repayment will result in a diminished death benefit payout. As with term insurance, the death benefit payout is tax-free.

“Whole life insurance is ideal for individuals looking to leave a legacy or secure financial stability for their dependents, regardless of how long they live,” Whiffen said. Those who value lifelong coverage coupled with an investment element should consider whole life insurance over term life, he said.

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How term life insurance works

Before you purchase a term life insurance policy, you should consider how much coverage you want, what term length you need and how much you can afford. Next, you will need to do some preliminary research and get quotes from different insurers to get an idea of the cost. Many companies make it easy to get free online quotes for term life insurance, and you may be approved to purchase a policy within minutes without taking a medical exam.

Once you’ve purchased a term life insurance policy, your coverage should go into effect immediately. Provided that you make premium payments on time, your policy will remain valid for the length of the term you choose. If the insured person (typically yourself or another family member) dies while the policy is in effect, the insurance company will make a tax-free lump-sum payment to all designated beneficiaries. Except for so-called “return of premium” term life insurance policies, no money will be refunded to the policyholder at the end of the policy term if the insured person is still living.

Types of term life insurance

There are several kinds of term life insurance available, including:

  • Level premium term life insurance, as the name suggests, has a fixed premium. Your monthly cost will not change during the policy’s lifetime, and the death benefit is guaranteed, meaning it will not decrease. This is the most common type of term life insurance available.
  • Decreasing term life insurance has premiums that decrease over time. As a result, the death benefit also decreases, often on an annual basis. This type of term life insurance policy is less common than level premium coverage.
  • Return of premium term life insurance is another less common form of coverage. Premiums may be level but will be much higher (as much as three times the cost, according to Guardian Life).

In all cases, common term lengths include five, 10, 15, 20, 25 and 30 years, although some companies offer policies with a one-year term, and others may offer even longer terms.

Pros and cons of term life insurance

Term life insurance, a policy that provides coverage for a specific period, has its benefits and drawbacks. While it offers an affordable way to secure substantial death benefits, it lacks the cash value growth that other permanent insurance policies might provide.

Consider the full list of pros and cons before deciding if term life insurance is right for you.

Pros

  • Less expensive than whole life insurance
  • Variety of terms and coverages available
  • Some term policies can be applied for and purchased online within minutes.

Cons

  • No cash value component
  • Coverage is temporary, not permanent.
  • A medical exam may be required, depending on the policy you choose.
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FAQ

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

In most cases, no. Unlike permanent life insurance, a standard term life policy carries no cash value. When the term expires, the policy is no longer valid and the insured person will no longer be covered. Some companies do offer what’s known as “return of premium” term life insurance, which will refund a set amount at the end of the term, but these policies tend to be far more expensive than standard term life coverage.

How much is term life insurance?

Term life insurance policy costs depend on several factors, including the insurer you choose, the length of the term and the amount of coverage you want. Other factors include your age, gender, overall health and profession. Generally, term life insurance costs more the older you are when you purchase a policy, and on average, women pay less than men for coverage. Depending on the insurer and the coverage you seek, you may be required to take a medical exam before your application is approved.

Can you cash in term life insurance?

Term life insurance does not accumulate cash value the way permanent life insurance policies do. For this reason, a policyholder cannot cash in a term life insurance policy.

Bottom line

Term life insurance is temporary life insurance designed to last for a set period of time. The death benefit is guaranteed so long as premiums have been paid and the insured person dies within the policy’s duration or term. Premiums are stable and relatively low compared to whole life insurance; the younger you are, the lower your premium is likely to be, too. Unlike whole (or permanent) life insurance, term life policies do not accumulate cash value over time. If the term expires and the insured person is still alive, no refunds or other payouts will usually be made to the policyholder. The one exception is a so-called “return of premium” term life policy, which has much higher premiums on average.

Experts say term life insurance is best for people who want coverage for a certain amount of time, such as new parents who want to create a financial safety net should one of them die unexpectedly before their child is grown or young homeowners who want added peace of mind while they’re paying off the mortgage. But if you want lifelong protection, particularly with an investment component that can be tapped in later years, you may want to consider other types of policies, such as whole life insurance.


Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
  1. Prudential, “Think you know life insurance?” Accessed March 7, 2024.
  2. Insurance Information Institute, “Life Insurance Basics.” Accessed March 7, 2024.
  3. Progressive, “Types of life insurance explained.” Accessed March 7, 2024.
  4. Fidelity Life, “What happens if you outlive your term life insurance?” Accessed March 7, 2024.
  5. Insurance Information Institute, “What are the different types of term life insurance policies?” Accessed March 7, 2024.
  6. Liberty Mutual Insurance, “What's the cost of term life insurance?” Accessed March 7, 2024.
  7. Fidelity Life, “Understanding term life insurance rates by age.” Accessed March 7, 2024.
  8. Fidelity Life, “Can you cash out term life insurance?” Accessed March 7, 2024.
  9. Northwestern Mutual, “What Is a Life Insurance Beneficiary?” Accessed March 7, 2024.
  10. Guardian, “Term life insurance: What it is and how it works.” Accessed March 7, 2024.
  11. Lemonade, “Should I Have a $1 Million Life Insurance Policy?” Accessed March 15, 2024.
  12. Choice Mutual, “Whole Life Insurance Rates By Age Charts.” Accessed March 15, 2024.
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