What Is Term Life Insurance and How Does It Work?

Shawn Plummer

CEO, The Annuity Expert

Term life insurance is a policy that provides coverage for a specific period of time, or “term.” This type of policy is typically cheaper than permanent life insurance policies and is a good option for people who want coverage for a limited period. This guide will discuss what term insurance is and how it works. We will also provide tips on choosing the right policy for your needs so you can protect your family’s financial future. Then shop and compare term life insurance quotes to find the best premium rates.

What is Term Life Insurance?

Term life insurance is temporary life insurance that will pay beneficiaries a specified amount if they die within a specific term. If the policy owner doesn’t die during the term, they can either renew the policy, convert it to a permanent life policy, or let the policy end. Term policies are sometimes referred to as “pure life insurance.”

Term policies are the most popular type of life insurance, offering a monthly premium and guaranteed death benefit. It is the most straightforward life insurance for those who need it. It is also typically more affordable than any other option because it does not include a savings component or investment return within the policy.

Term length ranges between 10 to 40 years. The policy expires after the term is completed. Policies are backed by the claims-paying ability of the issuing insurance company. (NAIC)

Most people shopping for life insurance need at least a term policy. This type of life insurance lasts for a certain number of years. It is affordable and easy to understand. You pay monthly premiums, and if you die during the term, the policy pays your beneficiary a lump sum. If you live past the term, then the life insurance expires.

Helpful Tip: Use our free tool to shop and compare term life insurance quotes, then apply for coverage in under ten minutes.

How Term Life Insurance Works

Term policies are designed to temporarily protect you for a set amount of time, usually 20 to 40 years. This life insurance works similarly to auto insurance, but instead of a car, your insuring a human life. You pay a monthly premium; if you die during the policy term, the insured’s beneficiaries receive a death benefit.

The insurer determines the premiums for a term policy based on the face value (the payout amount) and your age, gender, and health. A medical examination may be necessary for specific situations. For example, the insurance company may investigate your driving record, prescription drug history, smoking history, profession, hobbies, and family history.

If you die during the policy term, the term life insurance pays the policy’s face value to your beneficiaries. This cash benefit is not taxable and may be used by beneficiaries to replace everyday expenses and settle outstanding debts, including funeral costs, medical bills, or mortgage debt. However, there is no payout if you don’t die during the policy term. You may be able to renew a term policy at its expiration. Still, the premiums will be recalculated for your age at renewal and typically are significantly more expensive. Term policies may also be converted to the permanent policy too.

Term Insurance Example

The cheapest term life policy is usually the shortest-term coverage available since it provides a benefit for a short time and gives a death payment.

For example, a healthy 35-year-old female non-smoker can purchase a 20-year level-premium policy with a $250,000 face value for between $12 and $24 per month. If she dies within the 20-year term, the policy will pay her beneficiaries $250,000.

If the same female dies after she turns 55, her beneficiary will receive no benefit when the policy has expired. If she renews the policy, the premiums will be higher than her initial policy because they will be based on her age of 55 instead of 35.

Policy Types

Term life policies are available in a variety of forms.

  • Renewable Term policies: A renewable policy can be renewed at the end of the period without proof of insurability. Yearly renewable term cover may limit the number of renewals or an age beyond which renewals are not allowed. The renewal premium will be determined based on the insured’s current age.
  • Nonrenewable Term policies: A nonrenewable term policy lasts for a predetermined period of time and may not be extended after the expiration date.
  • Convertible Term: A convertible term life insurance policy allows customers to switch or convert temporary coverage for permanent insurance without producing proof of insurability. The term must be ended before the expiration date. The premium is calculated based on the current age when a policy is converted to permanent coverage.
  • Reentry Term: A reentry term policy allows the insured to submit evidence of insurability after the term and seek reduced premium rates than those offered for a renewable term policy.
  • Level Term: A level term policy is a life insurance policy in which the face amount doesn’t change throughout the coverage. The premiums may rise yearly or stay stable for the entire period.
  • Decreasing Term: A decreasing term policy begins with a large face amount and decreases each year. This policy is ideal for situations that decline over time, such as the outstanding balance on a mortgage.
  • Increasing Term: Increasing term begins with a small amount of coverage. The face value increases over time. The increasing term may be added as supplemental insurance to another policy. This will give you an extra death benefit equal to your paid premiums.
  • Interim Term: When a person needs immediate protection and is considering obtaining a permanent insurance policy right away, an interim term policy may cover the time until permanent protection begins. An interim term plan converts automatically after a specific length of time. The length of this coverage varies, but it generally lasts approximately 11 months.
  • Return Of Premium Term: All premiums paid into the policy are refunded if you live beyond your policy term. If you cancel your policy early, you may receive a portion of the premiums.
  • Mortgage Redemption Insurance: If you die before your mortgage is paid off, the mortgage redemption policy allows you to pay it off. The insurance will be adequate to cover the outstanding mortgage.
  • Deposit Term: A deposit term policy has a higher premium for the first year and decreases in subsequent years.
  • Group Life Insurance: Employer-provided group life insurance is term insurance that covers employees.

Skip The Medical Exam

A medical exam is not required for all term plans if you buy term life insurance. This life insurance option provides flexibility benefiting healthy individuals only, and they can obtain same-day coverage by taking advantage of it. Apply for coverage in less than 10 minutes without an insurance agent.

Term Life Insurance Calculator

Determine how much life insurance you need and can afford.

Term Life Insurance Rates

These are sample monthly life insurance term rates utilizing the most popular term, 20 years. The rates are based on age, gender, coverage amount, Preferred status, and non-tobacco consumers.

AgeGender$250k$500k$750k$1,000,000
25Female$10.95$16.37$21.79$22.98
Male$12.30$19.08$25.86$30.54
35Female$12.45$18.20$24.54$30.53
Male$13.80$21.64$29.70$33.93
45Female$21.24$36.95$52.67$67.85
Male$26.19$46.67$67.24$87.81
55Female$45.37$84.36$123.78$158.80
Male$61.24$114.71$169.30$221.55

After The Term Expires

What happens when a term life insurance policy expires? You have three options:

  • Do nothing, and continue life without coverage.
  • Purchase another insurance policy for additional life insurance coverage. Rates will be based on your age and medical condition when the old policy expires, which is often more expensive.
  • Convert the level term policy into a permanent life insurance policy. Universal life insurance and whole life insurance premiums will be more expensive.

Pros and Cons

Pros

  • Most affordable type of life insurance plan.
  • Simple to understand compared to other life insurance options.
  • Last for a fixed period of time, set by you.
  • The premium payments do not change during the term.

Cons

  • The policy is temporary and expires after the term.
  • No retirement savings component like the guaranteed cash value in a permanent life insurance policy.
  • No refunds after the term have expired.
  • No accidental death benefit.

Are Premiums Tax Deductible?

Can you write off term life insurance? Unfortunately, your life insurance premiums are not tax-deductible because they are considered a “personal expense” by the IRS. Therefore, you cannot deduct life insurance payments from your taxes if you buy them yourself. The only times when this is possible are when you pay for someone else’s policy.

Best Term Life Insurance Policies

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Next Steps

 If you are looking for a life insurance policy that is affordable and simple to understand, term life insurance may be the right option. Request a quote below to find out how much coverage you can get for a fixed period of time.

What Is Term Life Insurance? How Does A Term Life Insurance Policy Work?

Need Help Getting Coverage?

If you have a preexisting medical condition and want to buy life insurance, you will need help from an expert. This person can help ensure you get coverage, so you don’t get declined.

Warning: Applying for life insurance without a medical exam can be risky. If you get declined coverage, it could be at least two years before you can get any life insurance.

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Frequently Asked Questions

How much does term life insurance cost?

Term life insurance premiums start at $11 per month and stay the same for the entire time you have the policy.

What is the difference between term and whole life?

Term life insurance provides coverage for a period of between 10 and 40 years. Whole life insurance lasts your entire life and comes with a cash value component that grows over time.

Why is term life insurance usually the least expensive?

Term life insurance is the least expensive type because it is only a death benefit and ensures the individual for a limited number of years. There is no cash value accumulation. The policy’s death benefit is paid only if the insured person dies during the term of coverage.

Is term life insurance worth buying?

Term life insurance may be worth getting if you need coverage for a specific period, such as when you’re starting a family or have a limited budget.

What term is best?

40-year term life insurance is the most extended term life insurance policy. So you can feel safe knowing that you and your loved ones are covered with term life insurance for 40 years.

At what age should you stop term life insurance?

There is no set age to terminate your term coverage, but some people do so when they are older to save money and don’t require a death benefit for their children, spouse, or partner.

Does term insurance have cash value?

Unlike permanent life insurance products, term life policies do not have a savings component.

What are the best term life insurance ratings?

The best term life insurance ratings come from independent organizations like A.M. Best, Moody’s, and Standard & Poors. These organizations rate insurance companies based on their financial stability and ability to pay claims. “A-” to “A++” is the best ratings.

Which of the following best describes term life insurance?

The insured pays a premium for a specified number of years.

Which of the following best describes the fixed-period settlement option?

Under the fixed period option (also called period certain), a specified period of years is selected, and equal installments are paid to the recipient.

What is the difference between life insurance and term life insurance?

Life insurance is a type of insurance that pays out a death benefit to your beneficiary in the event of your death. Term life insurance is a type of life insurance that only lasts for a set period of time, such as 10 or 20 years.

What is the longest-term life policy?

The longest term life policy is 40 years.

At what age should you stop term life insurance?

It would be best to stop term life insurance when you no longer need it.

What is a 20-year life insurance policy?

A 20-year life insurance policy is term life insurance that pays out a death benefit to your beneficiary in the event of your death. The policy lasts for 20 years. A 20-pay life insurance policy is a type of permanent policy you pay into for 20 years instead of your entire life.

What is the cost of a $500,000 20-year term life insurance policy for someone in good health?

The median cost of a $500,000 20-year term life insurance policy for someone in good health is typically around $28 per month. However, the exact cost will depend on age, gender, health, and smoking status.

Can a 65-year-old get term life insurance?

Yes, a 65-year-old can get term life insurance. However, the premiums will be higher than for someone younger.

What are the pros and cons of term life insurance?

Some pros of term life insurance include that it is generally less expensive than other types of life insurance and can provide coverage for a specific period of time. However, some cons of term life insurance include that it only pays out a death benefit if you die within the policy’s term and does not build cash value.

What happens when a term life insurance policy matures?

When a term life insurance policy matures, the policy expires, and you no longer have coverage. To continue having life insurance coverage, you will need to purchase a new policy.

What does term life insurance mean?

Term life insurance means the policyholder is only covered for a specific term or time. After the term expires, the policyholder is no longer covered.

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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