Term life insurance is a type of policy that offers financial protection for a set period, usually 10 to 30 years. If the insured dies during this term, a death benefit is paid to the beneficiaries. This type of insurance is often sought by individuals who need coverage during specific times in their lives. For example, parents with young children may choose term life insurance to ensure financial stability for the family if something were to happen to them. Similarly, those with a mortgage or significant debt might find term life insurance coverage suitable to protect against financial strain.
What Is Term Life Insurance and Who Should Buy It?
Updated: September 19, 2024
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Table of Contents
Key Takeaways
Term life insurance provides up to 30 years of temporary life insurance coverage that can pay off short-term debts when you pass away.
Because the entire premium of a term life insurance policy is allocated to the death benefit, you can typically secure a sizable death benefit at a low cost.
Term life insurance differs from permanent life insurance because it has no cash value or investment component.
How Term Life Insurance Works
When considering term life insurance, the process begins with selecting a coverage amount and the term life insurance length, which can vary from 10 to 30 years. You'll then apply by completing a questionnaire about your health and lifestyle and possibly undergoing a medical exam. The insurer will evaluate your application, and if approved, you'll start paying regular premiums to keep the term life insurance policy active.
During the term, if you were to pass away, the policy would pay a predetermined death benefit to your chosen beneficiaries. The term life insurance death benefit can be a vital financial support, helping to cover significant expenses like mortgages, education costs or other financial needs that your family might face in your absence.
Term life insurance coverage ceases when the policy term ends, but you're not left without options. You can choose to renew the policy, although this might come at a higher premium due to your age or changes in your health. Alternatively, you may convert your term life insurance policy to permanent life insurance, which offers lifelong coverage but often at a higher cost. If neither of these options fits your needs, you can simply let the policy expire.
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Ensure you’re getting the best rate for your life insurance. Compare quotes from top providers to find the most affordable life insurance coverage for your needs.
How Much Term Life Insurance Costs
The cost of term life insurance varies based on several factors, including health, age, lifestyle, coverage amount and the term life insurance length. Generally, the younger and healthier you are, the lower your premium will be.
Term life insurance is often more affordable than other life insurance products like whole life insurance. While term life insurance coverage lasts a specific period, whole life provides coverage for a lifetime and includes a cash value component, typically making it more expensive. The choice between term and whole life depends on your individual needs, financial goals and budget, with term life insurance often being a cost-effective option for many.
MoneyGeek obtained quotes for term life insurance at different ages to show you how much term life insurance may cost. The tables below show how much you could pay for a 10- or 20-year term life insurance policy at different coverage levels.
Term Life Insurance Average Monthly Premiums: 10-Year Policy
| 30 | $250K$16 | $500K$20 | $1 Million$35 |
| 40 | $250K$23 | $500K$29 | $1 Million$53 |
| 50 | $250K$45 | $500K$65 | $1 Million$117 |
| 60 | $250K$91 | $500K$141 | $1 Million$271 |
| 70 | $250K$243 | $500K$410 | $1 Million$719 |
Term Life Insurance Average Monthly Premiums: 20-Year Policy
| 30 | $250K$20 | $500K$28 | $1 Million$50 |
| 40 | $250K$29 | $500K$44 | $1 Million$83 |
| 50 | $250K$64 | $500K$106 | $1 Million$203 |
| 60 | $250K$164 | $500K$286 | $1 Million$556 |
| 70 | $250K$752 | $500K$1481 | $1 Million$2988 |
Types of Term Life Insurance
Term life insurance is available in several types, each suited to different needs and circumstances:
1
Level Term Life Insurance
With premiums and death benefits that remain constant, level term life insurance is suitable for individuals or families wanting predictable costs and stability, especially during key life stages like raising children or paying off debts.
2
Decreasing Term Life Insurance
The death benefit decreases over the term, making this a fit for those with diminishing financial obligations. Homeowners often choose decreasing term life insurance to align coverage with a declining mortgage balance.
3
Increasing Term Life Insurance
This type offers a growing death benefit, making it ideal for young families or professionals expecting their financial responsibilities to increase with future expenses, such as educational costs for children.
4
Convertible Term Life Insurance
Convertible life insurance policies allow you to switch to permanent coverage without a medical exam or evidence of insurability. This flexibility makes it suitable for those who anticipate their long-term needs might change, such as newlyweds planning for a family. While policy conversion offers a seamless continuation of coverage, it may come at higher premiums compared to maintaining a term life insurance policy.
5
Renewable Term Life Insurance
With the option to renew coverage without requalification, this type is suitable for those who want to keep their insurance options open, even if their health changes. It may come with higher premiums upon renewal.
6
Group Term Life Insurance
Often provided by employers, group term covers multiple individuals under one policy. It's typically a fit for employees seeking a convenient and cost-effective insurance option through their workplace.
7
Return of Premium Term Life Insurance
This type of term insurance includes an option for returned premiums if the insured outlives the term. Return of premium life insurance is attractive to those wanting the security of term coverage but also wishing to recoup their investment if the coverage goes unused.
MONEYGEEK EXPERT TIP
Life insurance riders are additional benefits that can be attached to a basic term life insurance policy to provide broader protection. Adding riders can enhance your coverage by addressing specific concerns beyond the standard death benefit.
Common riders for term life insurance include the accelerated death benefit rider, which allows early access to funds if the policyholder is diagnosed with a terminal illness, and the waiver of premium rider, which forgives premiums if the policyholder becomes disabled. These options help tailor term life insurance coverage to better meet individual needs and circumstances.
Comparing Term and Permanent Life Insurance
When considering term vs. permanent life insurance, recognize that these are two primary categories of life insurance that provide financial protection for loved ones. However, they differ in coverage duration, cost and additional features, making them suitable for different financial needs and life stages.
Similarities:
- Purpose: Both types aim to provide financial security to beneficiaries in the event of the insured's death.
- Death Benefit: Both offer a death benefit that can be used to cover expenses like debts, funeral costs or ongoing family support.
Differences:
- Duration: Term life insurance covers a specific period, usually 10 to 30 years. In contrast, permanent life insurance covers the insured's entire life.
- Cost: Term life insurance is generally more affordable, with premiums focused solely on the cost of insurance. Permanent life insurance, encompassing whole life and universal life, tends to be more expensive due to lifelong coverage and additional features.
- Cash Value: Permanent life insurance often includes a cash value component that grows tax-deferred over time. You can borrow against this or even withdraw it for financial needs. Term life insurance doesn't offer this feature.
- Flexibility: Permanent life insurance may offer more flexibility in premiums and death benefits, while term life insurance is more straightforward with fixed rates and benefits for the chosen term.
A term life insurance policy might be a fit for those seeking cost-effective, temporary coverage aligned with specific financial responsibilities. On the other hand, permanent life insurance may be suitable for those looking for lifelong coverage with additional investment components.
Pros and Cons of Term Life
Term life insurance is an excellent option for many individuals and families, but it’s not suitable for everyone. Consider the pros and cons of term life insurance to decide if it’s the right plan for you.
Pros of Term Life Insurance
Easy to Understand
Life insurance can be complicated, making some hesitant to buy coverage. Permanent life insurance has features that combine interest, market fluctuations and savings with life insurance proceeds. Term life is easy to understand because it simply provides a death benefit when you pass away within the policy term, as long as premiums are paid.
Inexpensive
Affordability is often one of the key advantages of term life insurance. Since it provides coverage for a specific period and lacks the investment component found in permanent life insurance, the premiums of a term life insurance policy are generally lower, making it a more budget-friendly option for many individuals and families.
More Coverage Available
After determining how much life insurance you need, you may be surprised to see that the final figure is $1 million or more. With a term life insurance policy, you can buy $10 million or more in life insurance at an affordable price.
Tax-Free Death Benefit
If you die during your policy term, your beneficiary or beneficiaries will receive a lump sum from the life insurance company. Fortunately, term life insurance death benefit proceeds are tax-free, so your beneficiary can keep the total amount to use as they wish.
Flexible Payment and Policy Options
One of the benefits of term life insurance is that it offers several payment and policy options. You can choose to pay your premiums monthly, quarterly, semi-annually or annually. Most life insurers charge a processing fee if you don’t pay once per year, so you may be able to save with an annual payment. You can also choose how long you need coverage, whether one year or 30. The most common terms are in increments of five years, from five to 30 years in coverage.
No Penalty for Canceling
If you decide to cancel your term life insurance policy while it’s active, you can do so without incurring any fees or penalties.
Cons of Term Life Insurance
Temporary Coverage
Term life insurance only offers temporary coverage, so it’s not always the best option for everyone. If you have permanent life insurance needs, like funeral expenses or caring for a special needs child into adulthood, term life insurance coverage may not be your best choice.
No Cash Value
One of the disadvantages of term life insurance is that it doesn’t build cash value, meaning it doesn’t include a savings account to borrow or withdraw from. If you cancel a term life insurance policy, you don’t get any money back unless you get a policy that offers a return of a premium feature, which comes with higher costs. This differs from permanent life insurance, which provides a surrender value based on the cash savings account if you cancel the policy.
Upper Age Limit
Term life insurance has a lower age cap than permanent life insurance. Though the maximum age limit varies by company and term length, most people can apply up to age 50 for all term lengths. Term life insurance for 60-year-olds or older may be limited to a 10- or 20-year term without the option for a 30-year term.
Compare Life Insurance Rates
Ensure you’re getting the best rate for your life insurance. Compare quotes from top providers to find the most affordable life insurance coverage for your needs.
Who Should Buy Term Life Insurance
Term life insurance offers temporary coverage for temporary financial needs, while permanent life insurance covers lifetime needs. Every situation is unique, so weighing your options and considering what’s best for you is always a great idea.
Young, Newlywed Couples
Young couples may not think they need life insurance, but this is the best time to buy term life insurance coverage. The younger and healthier you are, the better your rates will be. [Term life insurance can help couples] (https://www.moneygeek.com/insurance/life/couples-life-insurance/) with many financial needs, including replacing income, paying off outstanding debts like a mortgage, car and student loans and covering future financial needs like childcare and education costs.
Business Owners
Business owners can use term life insurance payout proceeds to pay off debts, expenses and outstanding taxes. The details are typically outlined in a buy-sell agreement contract, which is especially important if ownership or shares in the company are to be transferred to another party. Owners with valuable employees can also take out term life insurance on them, often called key person insurance. In this instance, the owner pays for the policy, and the company is the beneficiary, receiving the death benefit if the key employee dies.
Sole Financial Providers
Losing a sole source of income can be detrimental to a family, which is why term life insurance can be vital in these situations. The remaining parent can use the term life insurance death benefit as income replacement, allowing them to stay at home with their children instead of having to go to work right away. The proceeds can also be used for everyday expenses, current and future childcare, and education costs.
Individuals With Significant Debts
Term life insurance can be used to pay off debts upon the insured's death. The designated beneficiary will use the death benefit proceeds to pay off those debts — like student loans or a mortgage — rather than have to pay them out of pocket or forfeit the property. Proceeds can also be used to replace income or provide current and future financial support for remaining family members.
Stay-at-Home Parents
Stay-at-home parents provide enormous benefits to their families, allowing the other parent to work and earn income. Buying term life insurance for the stay-at-home parent means the working parent can continue working or stay home with the kids if they choose. The term life insurance death benefit can then be used for income replacement or to pay for childcare and other expenses.
How to Find the Best Term Life Insurance Policy
Finding the best term life insurance policies often depends on individual circumstances and specific financial needs. No single policy fits all, making it essential to consider personal factors when selecting the right coverage.
1
Assess Your Financial Needs
Estimate the financial support your family would require in your absence. This includes daily living expenses, debts and future obligations like education costs. Understanding these needs will help you determine the coverage amount necessary for your term life insurance policy.
2
Compare Policies and Providers
Shop around and compare different term life insurance policies from various insurers. Look for policies that offer the best value considering the coverage, term length, premium costs and the company’s financial stability.
3
Consider Your Health and Lifestyle
Your health and lifestyle significantly affect your insurance rates. A healthier lifestyle can lead to more favorable terms and lower premiums. Be honest about your health to find a policy that accurately reflects your situation.
4
Review Policy Flexibility
Some term life insurance policies offer options like renewal or conversion to permanent insurance. Assess the flexibility of each policy to accommodate future changes in your insurance needs.
5
Read Reviews and Customer Feedback
Check customer reviews and feedback about the insurance company’s service and claim settlement performance. A company with positive reviews is likely to provide a smoother experience.
6
Consult with an Insurance Advisor
If you need more clarification, consult with a professional insurance advisor who can help you navigate the complexities of term life insurance and find a policy that best suits your needs.
MONEYGEEK EXPERT TIP
To determine how much term life insurance coverage you need, start by calculating your long-term financial obligations — subtract any existing assets that can be used to cover those costs. Consider factors such as outstanding debts, future educational expenses, ongoing household expenses and an additional amount for inflation. A life insurance calculator or a discussion with a financial advisor can provide a more tailored estimate based on your specific circumstances.
Term Life Insurance FAQ
While buying term life insurance is often easier than purchasing other types of life insurance, you may still have questions throughout the process. Here are the answers to some of the most common questions about the pros and cons of term life insurance pros and cons.
What is term life insurance?
Term life insurance is a policy providing financial protection for a predetermined period, typically 10–30 years, and pays out a death benefit if the insured passes away during the term.
What are the key characteristics of term life insurance?
The characteristics of term life insurance include its fixed term length, which can range from one to thirty years, premium stability during the active term and lack of cash value accumulation. This type of insurance is purely protective, offering a death benefit if the insured dies during the term but no financial return if the term expires while the insured is still living.
What does term life insurance cover?
Term life insurance covers a death benefit to beneficiaries, aiding in expenses like debts, funeral costs and family support if the insured dies within the policy term.
How does term life insurance work?
Term life insurance works by the insured selecting a coverage amount and term length, paying regular premiums to keep the policy active, with benefits paid out if the insured dies during the term. It's vital to thoroughly read and understand the term life insurance terms and conditions to avoid surprises regarding premiums, renewability and coverage limits.
What is the primary benefit of term life insurance?
The advantages of term life insurance are its affordability, simplicity and flexibility. It provides substantial coverage for a fraction of the cost of permanent life insurance, making it accessible to a wider range of people.
Additionally, the clear terms and fixed duration allow policyholders to plan for specific financial responsibilities, such as education costs or mortgage payments.
What are the downsides of buying term life insurance?
While term is often the cheapest form of life insurance, buying coverage has some negatives. The policy doesn’t build cash value, has no surrender amount if you cancel, and, if you have to renew, your premium is adjusted based on your current age and health, which can mean much higher rates. You may not qualify for term life insurance if you have significant health issues.
Who is term insurance appropriate for?
Term insurance is most appropriate for young and healthy families with significant, temporary financial needs that must be covered should the family’s breadwinner pass away. However, anyone with a temporary financial need for life insurance protection can benefit from term life coverage.
Do you get your money back at the end of a term life insurance?
No, term life insurance typically does not return premiums at the end of the term. However, some policies called "return of premium" term life insurance do offer this feature, where the premiums paid are returned if the insured outlives the term, usually at a higher cost.
Which is better: term or whole life?
Term offers temporary coverage for a set number of years, while whole life provides coverage for the rest of your life. Whole life also accumulates cash value over time. It can be surrendered for that amount if you cancel the policy before you die. However, whole life is more expensive, so term may be better if you want low-cost coverage. The best option will vary depending on each individual’s unique life circumstances.
How long is term life insurance?
Term life insurance lasts for a specific duration agreed upon at purchase. Commonly available term life insurance terms are 10, 20 or 30 years. Some companies also offer 40-year term life insurance.
At what age does term life insurance end?
The ending age for term life insurance varies by policy but generally can extend up to 80-90 years, depending on the insurer and the specific term length chosen.
What is direct term life insurance?
Direct term life insurance refers to policies purchased directly from an insurer or through an online platform, simplifying the buying process without the need for an intermediary.
What is a 10-year term life insurance policy?
A 10-year term life insurance policy provides coverage for a decade, offering a fixed premium and death benefit, ideal for short-term financial protection needs.
What is a 30-year term life insurance?
A 30-year term life insurance policy provides coverage for a lengthy period, making it an ideal choice for those seeking long-term financial protection. This type of policy ensures that your family or beneficiaries are safeguarded against financial burdens in the event of an untimely death.
The suitability of a 30-year term, or any term life insurance, depends on individual needs, goals and financial situations, emphasizing that the best term life insurance varies based on personal circumstances.
Does term life insurance have a cash value?
No, term life insurance does not have a cash value component; it's purely for financial protection, with premiums paying for the death benefit without accumulating cash value.
Can you cash in a term life insurance policy?
You cannot cash in a term life insurance policy as it does not accumulate cash value. It only pays out a death benefit if the insured dies during the term.
Why buy term life insurance?
One of the main reasons for buying term life insurance is to secure affordable, temporary financial protection that matches personal coverage needs during critical financial responsibilities like raising a family or paying off a mortgage.
Is term life insurance worth it?
Term life insurance is worth it for those needing cost-effective, temporary coverage to protect loved ones from financial hardship in case of untimely death during the policy term.
How can you buy term life insurance?
You can buy term life insurance online or through insurance agents, offering a convenient way to compare policies, apply and obtain coverage tailored to your specific needs.
Are there shorter term life insurance lengths?
Yes, there are shorter term life insurance lengths, such as five-year term life insurance policies, designed for individuals seeking very temporary coverage or those in transition between longer-term policies.
What is individual term life insurance?
Individual term life insurance is tailored to cover one person with a policy that pays out a death benefit if the insured passes away during the term. This type of insurance is ideal for single individuals, sole providers or anyone who needs a straightforward, cost-effective way to protect their family’s financial future without the complexities of a cash value component.
About Mandy Sleight
Mandy Sleight is a licensed property, casualty, life and health insurance agent with 20 years of experience in the industry. She has worked for major insurance companies like State Farm and Nationwide, and most recently as the Operations Coordinator for a startup employee benefits company.
Sleight holds a business administration and management degree from the University of Baltimore and a master's in business administration from Southern New Hampshire University. She uses her vast knowledge of insurance and personal finance to create easy-to-understand and engaging content to help readers make smarter choices with their budgets and finances.