Term life insurance is a top choice for people who want to cover financial obligations that are common when raising a family.
With term life insurance in place, there’s a safety net that can provide funds for paying a mortgage, sending kids through college or other important concerns if you were no longer around.
What Is Term Life Insurance?
Term life insurance is a contract between a policyholder and an insurance company that says if the insured person passes away within the time period of the policy, the insurer will pay a death benefit to the beneficiaries named on the policy.
If you’re buying term life insurance, you have two main decisions to make: the length of the term and the coverage amount.
Key Features of Term Life Insurance
The key features of term life insurance are:
- It’s generally the cheapest way to buy life insurance.
- Term life insurance policies have a specific length of time when your rates are locked in.
- There’s no cash value in a term life insurance policy.
How a Term Life Insurance Policy Works
A term life insurance policy’s annual costs remain the same every year for the level term period, such as 10 or 20 years. Once the level term period is over, you can generally renew the policy, but at higher rates each year you renew.
The policy expires if you outlive the length of the policy without renewing. You receive none of the premiums paid into the policy unless you bought a return of premium term life insurance policy.
Many people buy term life insurance for income replacement. They’re looking for life insurance that will provide funds for a family to pay expenses for a certain number of years if they were no longer there to work and earn money. Term life is good for:
- Covering the years of a mortgage, so another borrower does not have to sell the house.
- Covering other specific debts that would be passed on to someone else.
- Covering the years until children have graduated from college, to make sure there are funds for tuition and living expenses.
The policyholder chooses both the length of the term and the coverage amount, such as $500,000.
If the insured person dies while coverage is in force, the beneficiaries receive the policy’s death benefit. If the insured person lives longer than the policy’s term and doesn’t renew it, the coverage ends.
You may be able to convert the term life policy to a permanent life policy, such as a whole life or universal life insurance. This is a useful tactic if you realize you want longer life insurance coverage and don’t want to shop for a new policy, perhaps because your current health would make it difficult.
Types of Term Life Insurance
Level term life insurance
A level term life insurance policy maintains the same premiums and death benefit throughout the term. Rates won’t increase as you age and the death benefit is consistent whether you die in the first or final year of the policy.
A level term life policy could be good for someone who wants consistency for many years.
Annual renewable term life insurance
An annual renewable term policy’s premiums increase each year you renew it. When you choose this policy, you’re guaranteed to keep coverage and don’t need to reapply.
It may be good for people who want to fill a short gap in life insurance. However, a short level term life policy may be a better choice.
Decreasing term life insurance
A decreasing term life insurance policy’s premiums stay the same over the length of the policy but the death benefit decreases steadily over time.
Mortgage life insurance is a form of decreasing term life. Here the payout is tied to the declining balance of your mortgage, and the beneficiary is the mortgage lender, not your family.
Regular term life insurance is a better bet because your family receives the payout and can use it for any expenses they choose.
Return of premium term life insurance
A return of premium term life policy promises to refund the premiums you paid if you outlive the policy. As you can imagine, the refund feature makes the policy more expensive.
Return of premium term life is available from companies such as Cincinnati Life, State Farm Life and Vantis Life.
How Much Does Term Life Insurance Cost?
Age and health are significant factors in life insurance rates when you’re buying a policy. Below are examples of rates for healthy life insurance buyers.
Factors That Could Affect Term Life Insurance Rates
The term life insurance coverage amount and term length affect your premiums. Other factors in life insurance quotes include:
- Height and weight
- Current and past health
- Family health history (parents and siblings)
- Nicotine and marijuana use
- History of substance abuse
- Driving record (especially DUIs and moving violations)
- Certain hobbies and activities (such as aviation, scuba diving and other risky hobbies)
- Criminal history
How Much Term Life Insurance Do You Need?
A good term life insurance amount is generally one that matches the debts or obligations you want to cover. Life insurance is often intended to pay a family’s expenses that would have been paid by the person’s salary.
If income replacement is your goal, you’ll want to know the approximate amount your family would need to maintain your standard of living for the time period you want to cover.
Picking a Term Life Insurance Length
To choose the best duration for a term life insurance policy, consider the length of the debt or situation you want to cover. For example, if you’re buying term life to cover the years until your children are through college, and that’s in nine years, you might pick 10-year term life insurance. If you just bought a house and took on a 30-year mortgage, you’re likely looking at 30-year term life.
Term life insurance is typically available in lengths of 10, 15, 20, 25 and 30 years. Some companies offer longer terms of 35 and 40 years (such as Banner Life and Protective).
The most common term life length purchased is 20 years, says Steve Robinson, Vice President of Partnerships for Legal & General America, which owns Banner Life.
If your family’s financial needs stretch past the typical term life lengths, consider a permanent life insurance policy, such as universal life insurance.
What Happens if You Outlive a Term Life Policy?
When your initial level term period ends (such as at the end of 10, 20 years or 30 years), you can renew the policy at a higher rate each year. You won’t receive a refund for your premiums paid (unless you purchased “return of premium” term life insurance).
It’s a good idea to get quotes for a new policy before you pay the higher renewal rate. Even though you’re older and may be less healthy, you could still find a better deal in a new policy.
Some folks decide they no longer need life insurance before they reach the end of the term and stop making payments. Before you go this route, make sure you truly no longer have the need for life insurance. If you end a policy and your life circumstances change later, you could regret not having kept the policy.
Choosing a Term Life Insurance Company
It’s a good idea to compare life insurance quotes to start your life insurance shopping journey. You may be tempted to focus solely on cost when you’re choosing an insurer. But the best term life insurance companies will offer benefits that give flexibility at a good price.
Coverage features to look for include:
Are there living benefits? These allow you to access your own death benefit in cases of severe illness. You can use the money to pay for medical expenses, or anything else.
Is the policy guaranteed to be renewable? This allows you to renew the policy (at a higher price) once the level term period runs out. It can be useful if you reach the end of the level term period and still need life insurance but have health problems.
Can you convert the term policy to a permanent policy? This allows you to switch to a permanent life insurance policy. But there’s usually a deadline for doing it, so make sure you know your time window for converting to a permanent policy.
Can you change the policy face amount? If your life insurance needs change in the future, can you adjust your coverage amount? Usually you can only adjust downward.
Other Tips for Buying Term Life Cover
- Laddering life insurance: If you have life insurance needs of different lengths, you can ladder life insurance policies to save money. For example, you might buy a 30-year policy to cover the length of a mortgage and a 20-year policy (or rider on the 30-year policy) to cover the time until children are out of college. This way you’re not grouping all obligations into one long policy.
- Temporary insurance: You often have the option to include a check for the first premium payment with your application and lock in coverage from your application date forward. It’s common for an application to take a month or more to process. This gives you coverage during the application process. Ask your agent about this “temporary coverage” before you submit the application.
What to Expect When You Apply for Term Life Coverage
When you have a quote that you like and are ready to buy a policy, you’ll fill out an application. The life insurance agent will likely go over your application answers. You may be asked to sign releases, such as one for your medical records.
Once the application goes to the insurance company, you may be asked to do a life insurance medical exam. This often includes height, weight, blood pressure, blood and urine samples, and questions about your prescriptions and health to verify the information on the application.
Depending on your age and/or amount of insurance requested, a life insurer might also request an EKG or cognitive assessment.
Behind the scenes, the life insurance company will be doing its own research on you. This often includes:
- Accessing a prescription drug database to see your current and past prescriptions.
- Requesting your medical records (if you signed a consent form).
- Pulling your motor vehicle report.
- Accessing information from past applications for individual life and health insurance from MIB Group.
- For high amounts of life insurance, such as $5 million and up, getting a third-party verified financial statement.
Checklist for the Term Life Buyer
Here’s how to organize a term life policy shopping effort.
Decide how much coverage you need
Use our free life insurance calculator to help you estimate your life insurance needs. In general, add up the expenses you want to cover (income replacement, college tuition, etc.) and subtract assets your family could use if you pass away (such as existing life insurance). Don’t undercut your coverage estimate. When in doubt, err on the side of more coverage. A life insurance agent can also walk you through calculations for a coverage amount.
Pick a term length
Buy a length that covers the number of years you want to provide coverage. During this term period, such as 20 years, your rates will be locked in. For example, maybe you want coverage to last until you retire, or until your children will have graduated from college.
If you want to skip the life insurance medical exam, ask your insurance agent about no-exam options
Younger and healthier buyers will have more options for no-exam life insurance. But if you’re in your 50s or older, or do not have a great health history, you may not find affordable no-exam choices.
Gather several term life quotes. In addition to price, look at the policies’ features such as living benefits and the ability to convert to permanent life.
Term Life Insurance Alternatives
Term life isn’t the only type of life insurance so you could be wondering is term life insurance worth it. There are also multiple types of permanent life insurance policies.
Unlike term life, permanent life policies last your life as long as you make your payments. So, beneficiaries are guaranteed a death benefit with a permanent life policy. These policies additionally build cash value, which lets the policyholder tap into the policy during their lifetimes.
Here are different permanent life insurance policies:
Whole life insurance
Whole life insurance guarantees a death benefit as long as you make your payments. It also guarantees you a minimum rate of return on the cash value, level premiums and a guaranteed death benefit that won’t decrease.
Universal life insurance
Universal life insurance policies offer lifelong coverage and often build cash value, which grows tax-free. You may be able to adjust your premium payments and the death benefit, within certain limits.
There are multiple types of universal life insurance policies:
- Guaranteed universal life: The cheapest universal life policy typically, a guaranteed universal policy offers cash value, which can be minimal. However, it doesn’t offer flexibility to adjust premiums and death benefit, which are found in some other universal life policies.
- Indexed universal life: An indexed universal life insurance policy connects a policy’s cash value to an index, such as the S&P 500. You can change premiums and the death benefit, within certain limits.
- Variable universal life: A variable universal life insurance policy’s cash value is tied to sub-accounts that can include stocks and bonds. The success of the investment choices impacts the policy’s cash value. You have the flexibility to make changes to premiums and death benefit. A variable universal policy requires the policyholder to manage the investments and can result in gains or losses based on your choices.
Variable life insurance
Like variable universal life insurance, variable life insurance is a type of permanent life insurance. They both offer investment options and the cash value will vary based on market performance. But they differ in how premiums and death benefits are managed.
Variable life insurance: You can’t adjust your the premium witth a variable life insurance policy. Also, variable life insurance guarantees the death benefit won’t drop below a specified dollar amount, regardless of investment performance.