What is Term Life Insurance?

Term life insurance is a type of life insurance policy that provides coverage for a specific period, generally 10, 15, 20, 30, or even 40 years. If you pass away while the policy is active, your beneficiaries can receive the policy's death benefit. 

If you outlive the policy term, your coverage generally expires, and your beneficiaries won't receive the death benefit or a refund of the premiums you paid unless you have a return-of-premium term policy. 

To help you understand whether term life insurance may be right for you, this guide explains how it works, the different types available, how much it costs, how much coverage you may need, and what happens when the policy expires. 

How Does Term Life Insurance Work?   

If you’re exploring life insurance to secure the financial future of your loved ones, it’s important to understand how a policy works before buying one. While term life insurance seems quite straightforward, it can get confusing, especially if you’re not aware of how it actually works. 

In simple terms, term life insurance provides coverage for a set period in exchange for regular premium payments. Here’s how the process generally works.

• Apply for a policy: You start by completing an application with information about yourself, your health, lifestyle, financial situation, and the coverage you want. Depending on the insurer and policy, you may also need to undergo a medical exam or provide medical records as part of the underwriting process. 
• Choose your coverage and policy term: When you purchase a term life insurance policy, you choose how much coverage you want and how long you want the policy to remain active. Common term lengths include 10, 15, 20, 30, and 40 years. 
• Name your beneficiaries: You designate one or more beneficiaries who will receive the policy’s death benefit if you pass away while the policy is active. 
• Pay your premiums: Once your policy is active, you need to make regular premium payments to keep your term life insurance coverage active. You generally continue paying throughout the term unless you cancel the policy, you pass away during the term, or the term expires. 
• Death benefit is paid to your beneficiaries: If you die while your policy is active, your insurer generally pays the death benefit to your named beneficiaries. They can typically use the money to cover living expenses, debts, mortgage payments, education costs, or other financial needs. 
• The policy expires when the term ends: If you outlive the policy term, your coverage generally ends without a death benefit being paid. Depending on your policy, you may have options to renew the coverage or convert it to a permanent life insurance policy.

Before learning more about term life insurance, it’d be better for you to have a proper idea of what life insurance is and how it works. Understanding how life insurance works can also help you compare your options based on your financial needs and goals. Explore our affordable life insurance policy options to learn more. 

Types of Term Life Insurance Options  

If you’re exploring term life insurance, you’ll come across seven common types, each with different features and coverage structures. Understanding how these options differ can help you identify which type may suit your financial needs and coverage goals. 

Level Term Life Insurance   

Level term life insurance provides a fixed amount of coverage for a specific period, such as 10, 15, 20, 30, or 40 years. The death benefit remains the same throughout the policy term, which is why level term life insurance is sometimes also referred to as fixed term life insurance. Your beneficiaries generally receive the same death benefit if you pass away while the policy is active. 

With a level term policy, your premium is also typically fixed for the duration of the term. This can make it easier to plan your budget because your premium and death benefit generally remain unchanged throughout the policy period. 

For example, if you purchase a 20-year level term life insurance policy with a $500,000 death benefit, your beneficiaries would generally receive $500,000 if you pass away during those 20 years, provided the policy is active and its terms are met.  

At the end of the term, the policy generally expires unless you have a renewal option or another provision that allows you to continue or convert the coverage. 

Annual Renewable Term (ART) Life Insurance 

Annual Renewable Term (ART) life insurance provides coverage for one year at a time, with the option to renew the policy each year without having to purchase a new policy. The death benefit generally remains the same when you renew, but your premium can increase as you get older. 

For example, you may purchase an ART policy with a $500,000 death benefit and renew it annually. If you continue renewing the policy, your coverage can remain in place, but the premium will generally increase with each renewal based on your age and the policy terms. 

One advantage of ART life insurance is that you may be able to continue your coverage without going through the full application process or another medical exam each year. However, the increasing premiums can make ART more expensive over time compared with a level term policy. 

ART life insurance may be useful if you need coverage for a short or uncertain period and want the flexibility to renew your policy annually. The specific renewal terms, premium increases, and maximum renewal age can vary by insurer and policy.

Increasing Term Life Insurance   

Increasing term life insurance is a type of term policy in which the death benefit increases over time, usually according to a predetermined schedule or percentage. Unlike level term life insurance, where the coverage amount stays the same throughout the term, increasing term coverage is designed to provide a larger death benefit as your financial needs change.

For example, you may start with a $500,000 death benefit that increases by 5% each year. If you pass away while the policy is active, your beneficiaries would generally receive the increased death benefit that applies at that time, subject to the policy's terms. 

As the amount of coverage increases over time, your premium may also increase depending on how the policy is structured. Some policies may allow you to increase coverage at specific intervals or after certain life events, while others follow a predetermined increase schedule. 

Increasing term life insurance may be useful if you expect your financial responsibilities or the amount of protection your beneficiaries need to grow over time, especially if you want your coverage to keep up with inflation. The available increase options, premium adjustments, and eligibility requirements can vary by insurer and policy. 

Decreasing Term Life Insurance   

Decreasing term life insurance is designed for situations where the amount of financial protection you need is expected to decrease over time. The death benefit gradually becomes smaller throughout the policy term, usually according to a predetermined schedule. 

This type of coverage is commonly associated with financial obligations that also decline over time, such as a mortgage or other debt. For example, if you have a $500,000 mortgage that you expect to pay down over several years, a decreasing term policy can provide a death benefit that declines as your outstanding balance decreases.  

If you pass away while the policy is active, your beneficiaries can generally use the death benefit to help pay the remaining obligation. Typically, the coverage amount decreases over the term, and that’s why decreasing term life insurance may have lower premiums than some policies that provide a level death benefit.  

Decreasing term life insurance may be useful if your primary goal is to protect a financial obligation that is expected to become smaller over time. The rate at which the death benefit decreases and other policy features can vary by insurer and policy. 

Convertible Term Life Insurance   

Convertible term life insurance gives you the option to convert your term life insurance policy into a permanent life insurance policy without having to apply for a new policy or undergo another medical exam, as long as you meet the conversion requirements. This feature can give you more flexibility if your insurance needs change over time. 

For example, you may initially purchase a 20-year term life insurance policy when you want affordable coverage during your working years. Later, you may decide that you want lifelong coverage or features available with permanent life insurance, such as whole life or universal life insurance. If your policy includes a conversion option, you may be able to convert some or all of your term coverage to a qualifying permanent policy. 

The conversion usually needs to take place within a specific period or before a certain age, depending on the policy and insurer. Your premium will generally increase after conversion because permanent life insurance typically costs more than term coverage. 

Convertible term life insurance may be useful if you want the affordability of term coverage now while keeping the option to switch to permanent coverage later. The types of permanent policies available for conversion, conversion deadlines, and other requirements can vary by insurer and policy. 

Return of Premium (ROP) Term Life Insurance  

Return of Premium (ROP) term life insurance is a type of term policy that may return some or all of the premiums you paid if you outlive the policy term, provided you meet the policy’s requirements. If you pass away while the policy is active, your beneficiaries generally receive the death benefit instead of a premium refund. 

For example, suppose you purchase a 20-year ROP term life insurance policy and make all required premium payments throughout the term. If you outlive the 20 years, you may receive a refund of the eligible premiums you paid, depending on the policy’s terms. If you pass away during the term, your beneficiaries generally receive the policy’s death benefit. 

ROP term life insurance typically costs more than a standard level term policy because it may provide a premium refund if you outlive the term. The exact refund amount, eligibility requirements, and conditions for receiving it can vary by insurer and policy. 

ROP term life insurance may be worth considering if you want term life coverage while also having the potential to recover eligible premiums at the end of the term. However, you should review the policy terms carefully to understand when and how the premiums are refunded. 

Group Term Life Insurance 

Group term life insurance provides life insurance coverage to a group of people under a single policy, rather than requiring each person to purchase an individual policy. It is commonly offered by employers as part of an employee benefits package, although associations and other organizations may also offer group coverage to their members. 

With employer-sponsored group term life insurance, the employer typically selects the policy and determines the available coverage options. You may receive a basic amount of coverage at little or no cost, with the option to purchase additional coverage depending on the plan. The policy generally remains active as long as you meet the eligibility requirements and the group policy remains in place. 

One potential advantage of group term life insurance is that you may not need to go through the same underwriting process required for an individual policy, particularly for basic employer-provided coverage. However, the coverage amount may be limited, and the policy may not remain in place if you leave your employer. Some plans may allow you to convert or continue the coverage after leaving, depending on the policy terms. 

Group term life insurance can provide a convenient way to obtain life insurance through your employer or another organization. Reviewing the coverage amount, costs, and options available when you leave the group can help you understand whether the coverage meets your long-term needs. 

How Much Does Term Life Insurance Cost?  

The cost of term life insurance mainly depends on factors such as your age, coverage amount, policy term, gender, health, lifestyle, and location. According to NerdWallet, a healthy 40-year-old man may pay around $321 per year for a $500,000, 20-year term life insurance policy.  

For example, NerdWallet's current rate data shows that a healthy 40-year-old nonsmoking man may pay around $321 per year for a $500,000, 20-year term policy, compared with $278 per year for a woman with the same coverage. For smokers, the average annual premium rises to around $1,455 for a man and $1,157 for a woman. 

Women generally pay less for term life insurance than men of the same age and health because women have a longer average life expectancy. Since life insurance premiums reflect the likelihood of an insurer paying the death benefit during the policy term, the lower mortality risk associated with longer average life expectancy can result in lower premiums. 

Smoking can have an even more significant effect on premiums. Insurers generally charge smokers more because smoking is associated with a higher risk of serious health conditions and smoking-related death. 

Typically, term life insurance premiums vary based on the insurer and your individual circumstances. If you're trying to figure out how much it may cost, consider speaking with an insurance agent or exploring our affordable life insurance policy options.

How Much Term Life Insurance Do You Need?   

The amount of term life insurance you need depends on your financial responsibilities, income, debts, and the level of financial support you want to provide to your loved ones. Common term life insurance coverage amounts include $250,000, $500,000, $1 million, and $2 million, although the amount available to you may vary based on the insurer and your individual circumstances. 

When estimating how much coverage you may need, consider factors such as:

• Income replacement: Consider how much of your income your family would need to replace and for how many years. 
• Debts and mortgage: Include outstanding debts, such as a mortgage, personal loans, or other balances that your family may need to repay. 
• Future expenses: Consider expected costs such as your children's education, childcare, or other major financial responsibilities. 
• Final expenses: Account for funeral, burial, cremation, and other end-of-life expenses. 
• Existing savings and assets: Your savings, investments, retirement accounts, and other assets may reduce the amount of life insurance you need. 
• Existing life insurance: If you already have coverage through your employer or another policy, factor that coverage into your overall calculation.

For example, if your family relies heavily on your income, you have a mortgage and other debts, and you want to help fund your children's education, you may need more coverage than someone with fewer financial obligations. 

There is no single amount of term life insurance that works for everyone. Reviewing your current financial situation, future obligations, and the needs of your beneficiaries can help you determine an appropriate coverage amount. 

How Long Should Your Term Life Insurance Last?  

The right term length depends on how long your loved ones may need financial protection and how long your major financial responsibilities are expected to last. Common term life insurance durations include 10, 15, 20, 25, 30, or 40 years, although available options can vary by insurer. 

When choosing a term length, consider how long you expect your financial responsibilities to continue. For example, you may want your policy to last until:

• Your children become financially independent: If you have young children, you may choose a term that lasts until they are likely to finish school and become financially independent. 
• Your mortgage is paid off: A term that aligns with the remaining years on your mortgage can help provide financial protection while your family still has that obligation. 
• You reach retirement: If your family depends on your income, you may choose a term that lasts until you expect to retire and no longer need to replace that income. 
• Other major debts or financial obligations are paid off: Consider the length of time you expect to have significant loans or other financial responsibilities.

For example, if you have young children, a 20- or 30-year term may provide coverage during much of the period when they depend on your income. If your primary goal is to protect a mortgage with 15 years remaining, a 15-year term may align more closely with that financial obligation. 

If you choose a term that is too short, it could leave you without coverage while you still have significant financial responsibilities. On the other hand, a longer term may provide protection for a longer period but can also result in higher premiums. So, it’s important to evaluate your financial obligations, income needs, and long-term goals to determine a term length that’s most suitable for your situation.  

Benefits and Drawbacks of Term Life Insurance   

Term life insurance can provide affordable financial protection for a specific period, making it a common choice for people who want to protect their loved ones during their working years or while they have major financial obligations. However, term coverage also has limitations that you should consider before choosing a policy. 

Before deciding whether to purchase term life insurance, you should closely weigh the pros and cons to decide whether it aligns with your financial needs and goals.

How to Choose a Term Life Insurance Policy?  

When it comes to choosing a term life insurance policy, it’s important to consider how much coverage your beneficiaries may need, how long you need the protection, and which policy features are important to you. Comparing these factors can help you narrow down your options and choose a policy that aligns with your financial needs.  When choosing a term life insurance policy, consider the following steps.

• Determine how much coverage you need: Consider your income, debts, mortgage, dependents, future expenses, existing assets, and other financial obligations to estimate the death benefit your beneficiaries may need. 
• Choose an appropriate term length: Consider how long your family may depend on your income and how long major financial obligations, such as a mortgage or education expenses, are expected to last. 
• Compare premiums: Get quotes from multiple insurers and compare premiums for similar coverage amounts and term lengths. A lower premium may not always mean the policy is the right fit for your needs. 
• Review the policy features: Check whether the policy offers features such as conversion options, renewal options, or a return-of-premium provision if those features are important to you. 
• Understand the eligibility requirements: Insurers may consider factors such as your age, health, medical history, lifestyle, and other personal information when determining your eligibility and premium. 
• Check the insurer's financial strength: Consider the insurer's ability to meet its financial obligations and pay claims over the life of your policy.

The Bottom Line: Is Term Life Insurance Worth It?   

Yes, term life insurance can be worth considering if you want affordable financial protection for a specific period. It can provide your beneficiaries with a death benefit to help cover income loss, debts, mortgage payments, education costs, and other financial obligations if you pass away during the policy term. 

Whether term life insurance is right for you depends on your coverage needs, financial responsibilities, term length, and long-term goals. Understanding these factors can help you choose coverage that provides the protection your loved ones may need. 

If you’re not sure whether to invest in term life insurance or another life insurance policy, you can contact us to get a free quote and expert advice to make the right decision based on your specific coverage needs.  

Frequently Asked Questions (FAQs)

What happens if you outlive your term life insurance policy?

If you outlive your term life insurance policy, the coverage generally ends, and your beneficiaries won't receive a death benefit. Depending on the policy, you may be able to renew the coverage, convert it to permanent life insurance, or purchase a new policy. 

Do you get your money back from term life insurance?

Generally, no. If you outlive a standard term life insurance policy, you typically won't receive a refund of the premiums you paid. A return-of-premium policy may refund eligible premiums if you meet its requirements. 

Can you renew term life insurance after it expires?

Some term life insurance policies include a renewal option that allows you to continue coverage after the initial term. However, your premiums will generally increase based on your age and the policy's renewal terms. 

Can you cancel term life insurance at any time?

Yes, you can generally cancel a term life insurance policy at any time by stopping your coverage or following the insurer's cancellation process. You typically won't receive a refund of premiums already paid. 

Does term life insurance have cash value?

No, standard term life insurance generally does not build cash value. You pay premiums for coverage during a specific period, and the policy pays a death benefit if you pass away while the coverage is active. 

Can you convert term life insurance to permanent life insurance? 

Some term life insurance policies allow you to convert some or all of your coverage to a qualifying permanent life insurance policy without going through a new medical exam. Conversion options and deadlines vary by policy and insurer.