What Is Term Life Insurance?
Term life insurance provides a death benefit that pays the beneficiaries of the policyholder throughout a specified period of time.
Once the term expires, the policyholder can either renew it for another term, possibly convert the policy to permanent coverage, or allow the term life insurance policy to lapse.
Key Takeaways
- Term life insurance guarantees payment of a stated death benefit to the insured’s beneficiaries if the insured person dies during the specified term.
- These policies have no value other than the guaranteed death benefit and don’t feature a savings component (as is found in permanent life insurance products).
- Term life premiums are based on a person’s age, health, and life expectancy.
- Depending on the insurance company, it may be possible to turn term life into whole life insurance.
- You can purchase term life policies that last 10, 15, 20 years, or more, and can usually renew them for an additional term.
How Term Life Insurance Works
When you buy a term life insurance policy, the insurance company determines the premium based on the policy’s value (the payout amount) and factors such as your age, gender, and health. Other considerations include the company’s business expenses, how much it earns from its investments, and mortality rates for each age.
In some cases, a medical exam may be required. The insurance company may also inquire about your driving record, current medications, smoking status, occupation, hobbies, and family history.
If you die during the policy term, the insurer will pay the policy’s face value to your beneficiaries. This cash benefit—which is not typically taxable—may be used by beneficiaries to settle your healthcare and funeral costs, consumer debt, mortgage debt, and other expenses. Understanding, however, that beneficiaries are not mandated to use the insurance proceeds to settle the deceased’s debts is key.
If the policy expires before your death or you live beyond the policy term, there is no payout. You may be able to renew a term policy at expiration, but the premiums will be recalculated based on your age at the time of renewal.
Cost of Term Life Insurance
Term life is usually the least costly life insurance available because it offers a death benefit for a restricted time and doesn’t have a cash value component like permanent insurance has. For example, data show that a healthy non-smoking man aged 30 could get a 30-year term life insurance policy with a $500,000 death benefit for an average of $30 per month. At age 50, the premium would rise to $138 a month.
| Term Life Insurance Rates | ||
|---|---|---|
| $500,000 Coverage | Average Monthly Cost, Male | Average Monthly Cost, Female |
| 30 years old | $30 | $25 |
| 40 years old | $52 | $42 |
| 50 years old | $138 | $101 |
| 55 years old | $241 | $180 |
In contrast, here’s a look at rates for a $500,000 whole life policy. As you can see, the same 30-year-old healthy male would pay an average of $282 a month. At 50, he’d pay $571.
| Whole Life Insurance Rates | ||
|---|---|---|
| $500,000 Coverage | Average Monthly Cost, Male | Average Monthly Cost, Female |
| 30 | $282 | $247 |
| 40 | $382 | $352 |
| 50 | $571 | $498 |
| 60 | $887 | $782 |
Most term life insurance policies expire without paying a death benefit. This results in a lower overall risk to the insurer compared to a permanent life policy, allowing insurers to offer lower premiums. Factors such as interest rates, the financial status of the insurance company, and state regulations can also affect premiums.
When considering the amount of coverage you can get for your premium dollars, term life insurance tends to be the least expensive life insurance. Check our recommendations for the best term life insurance policies when you are ready to buy.
Example of Term Life Insurance
Thirty-year-old George wants to protect his family in the unlikely event of his early death. He buys a 10-year, $500,000 term life insurance policy with a premium of $50 per month.
If George dies within the 10-year term, the policy will pay George’s beneficiary $500,000. If he dies after the policy has expired, his beneficiary will receive no benefit. If he remains alive and renews the policy after 10 years, the premiums will be higher than his initial policy because they will be based on his current age of 40 rather than 30.
If George is diagnosed with a terminal illness during the first policy term, he probably will not be eligible to renew the policy when it expires. Some policies offer guaranteed re-insurability (without proof of insurability), but such features come with a higher cost.
Types of Term Life Insurance
There are several types of term life insurance. The best option will depend on your individual circumstances. Generally, most companies offer terms ranging from 10 to 30 years, although a few offer 35- and 40-year terms.
Level Term or Level-Premium Policy
Level-premium insurance has a fixed monthly payment for the life of the policy. Most term life insurance has a level premium, providing coverage for a period ranging from 10 to 30 years. The death benefit is also fixed.
Because actuaries must account for the increasing costs of insurance over the life of the policy’s effectiveness, the level premium is relatively higher than yearly renewable term life insurance.
Yearly Renewable Term (YRT) Policy
Yearly renewable term (YRT) policies are one-year policies that can be renewed each year without providing evidence of insurability.
The premiums rise from year to year as the insured person ages, potentially becoming prohibitively expensive as the policyholder ages. However, they may be a good option for someone who needs temporary insurance.
Decreasing Term Policy
These policies have a death benefit that declines each year according to a predetermined schedule. The policyholder pays a fixed, level premium for the duration of the policy.
Decreasing term policies are often used in concert with a mortgage, with the policyholder matching the payout of the insurance to the declining principal of the home loan.
Benefits of Term Life Insurance
Term life insurance is particularly attractive to young people with children. Parents can obtain substantial coverage for a low cost, and if the insured dies while the policy is in effect, the family can rely on the death benefit to replace lost income.
These policies are also well-suited for people with growing families. They can maintain coverage needed until, for example, their children reach adulthood and become self-sufficient.
The term life benefit may be equally useful to an older surviving spouse. However, premiums for people who wait until they are older to apply for coverage will pay higher premiums than if they’d gotten a level-term policy when they were younger.
Each insurance company sets a maximum age for their term life insurance coverage, usually ranging from about 80 to 90 years old.
Term Life Insurance vs. Permanent Life Insurance
The main differences between a term life insurance policy and a permanent insurance policy (such as whole life or universal life insurance) are the duration of the policy, the accumulation of a cash value, and the cost. The right choice for you will depend on your needs.
Cost of Premiums
Term life policies are ideal for people who want substantial coverage at a low cost.
People who own whole life insurance pay more in premiums for less coverage but have the security of knowing they are protected for life.
People who buy term life pay premiums for an extended period, but they get nothing in return unless they have the misfortune to die before the term expires. Plus, term life insurance premiums increase with age.
Availability of Coverage
Unless a term policy is guaranteed renewable, the company could refuse to renew coverage at the end of a policy’s term if the policyholder develops a severe illness. Permanent insurance provides coverage for life as long as premiums are paid, regardless of changes in the insured’s health.
Investment Value
Some customers prefer permanent life insurance because the policies typically contain an investment or savings vehicle. A portion of each premium payment is allocated to the cash value, which usually grows while the policy remains in force. Some plans pay dividends, which can be paid out in cash or left on deposit within the policy.
Over time, the cash value may grow large enough to pay the premiums on the policy. There are also several unique tax benefits, such as tax-deferred cash value growth and tax-free access to the cash portion.
Financial advisors often warn that the growth rate of a policy with cash value is usually paltry compared to other financial instruments, such as mutual funds and exchange-traded funds (ETFs). However, the performance of permanent insurance can be steady and it is tax-advantaged, providing additional benefits when the stock market is volatile.
Term Life Insurance vs. Convertible Term Life Insurance
Convertible term life insurance is a term life policy that includes a conversion rider. The rider guarantees the right to convert an in-force term policy—or one about to expire—to a permanent plan without going through underwriting or proving insurability. The conversion rider should allow you to convert to any permanent policy the insurance company offers with no restrictions.
The primary features of the rider are maintaining the original health rating of the term policy upon conversion (even if you later have health issues or become uninsurable) and deciding when and how much of the coverage to convert. The basis for the premium of the new permanent policy is your age at conversion.
Overall premiums will increase significantly since whole life insurance is more expensive than term life insurance. The advantage is the guaranteed approval without a medical exam. Medical conditions that develop during the term life period cannot cause premiums to be increased.
Which Is Better: Term Life Insurance or Whole Life Insurance?
It depends on your family’s needs. Term life insurance is a relatively inexpensive way to provide a lump sum to your dependents if something happens to you. If you are young and healthy, and you support a family, it can be a good option. Whole life insurance comes with substantially higher monthly premiums, meant to provide coverage for as long as you live. As the coverage matures, the policy grows in value and the policyholder can make withdrawals for any purpose.
Do You Get Your Money Back at the End of a Term Life Insurance Policy?
If you’re alive when the term expires, you get nothing back from your term life insurance policy. The death benefit is only payable to your beneficiaries if you die. That is the reason why term life insurance is relatively inexpensive. Most people outlive their term life insurance policies.
Can a Senior Citizen Get Term Life Insurance?
It depends on their age. Insurance companies set a maximum age limit for term life insurance policies, usually between 80 and 90 years old, though this can vary. Premiums also rise with age, so a person aged 60 or 70 will pay substantially more than someone decades younger.
The Bottom Line
Term life insurance is an excellent option for people who can’t or won’t pay the much higher monthly premiums associated with whole life insurance. Term life is somewhat similar to car insurance. It’s statistically unlikely that you’ll need it, and the premiums are money down the drain if you don’t. But if the worst happens, your family will receive the benefits.
Related Terms: Whole Life Insurance, Permanent Insurance, Cash Value, Convertible Insurance, Yearly Renewable Term.
References
- Insurance Information Institute. “What Are the Principal Types of Life Insurance?”
- New York Department of Financial Services. “The Cost of Life Insurance”.
- Internal Revenue Service. “Life Insurance & Disability Insurance Proceeds”.
- Guardian Life. “Level Term Life Insurance: What It Is and How To Buy It”.
- Progressive. “What Is Decreasing Term Insurance?”
- Guardian Life. “Why You Should Consider Convertible Term Life Insurance”.
