Term Life Insurance: Different Types, What It Is & How It Works

Term life insurance is a form of life insurance that guarantees a death benefit (payout) for your beneficiaries if you pass away during the term. It is one of the best ways to provide coverage to compensate for lost dual income, or specific bills like a mortgage or loan.

According to Forbes, 54% of Americans don’t have life insurance because they don’t know what type to get, or how much coverage. This means more than half of Americans would struggle with significant financial hardship if a spouse or parent passed away unexpectedly.

Term policies can be selected for between 1 and 40 years based on your age when you activate the new policy, so you have room to select a time frame that coincides with your current financial obligations.

How Does Term Life Insurance Work?

Term life insurance gives you coverage for a specified term, or length of time. It is the simplest form of coverage; you pay a premium each month for a set time frame, and if you pass away during that time frame, your beneficiaries receive a death benefit–the amount of coverage you paid for with your policy.

For example, if you get a 10-year term policy, you have life insurance in the event you pass away during those ten years. If you get a 20-year policy, you are covered for twenty years.

What Does Term Life Insurance Cover?

Term life insurance is designed to cover any remaining expenses should you pass away unexpectedly.

For example:

• If you currently owe $203,000 on your mortgage and you were to pass away unexpectedly, your family might not be able to pay off the remainder of the mortgage.
• If you are the cosigner on a lease for your son’s car and you were to pass away, they might not be able to keep their car because they no longer have a cosigner.
• If you or someone in your immediate family still has student loans or credit card debt, your unexpected passing might make it difficult for them to continue payments.

Term life insurance is designated in coverage amounts and you can choose the coverage amount such as $100,000, $250,000, $500,000, or 1 million+.

Burial

If you pass away during your coverage period, or term, your family can use that money however they see fit, including the final expenses for your funeral.

Mortgage

Your family can also put the death benefit toward paying off the mortgage or at least making mortgage payments. If they so choose, they can use any remaining balance to cover daily expenses.

Debt

Your beneficiaries and family can choose to spend the death benefit on any other debt you have like your son’s car payments, or your existing student loans.

Education

The money can also be put toward things like education for your children in the event that you pass away before they go to school.

Daily Life

Some people choose a term life insurance policy simply so that their family can have money for everyday expenses like gas and groceries in their absence.

Is Term Life Insurance Right if I Only Want to Cover a Funeral?

No, in most cases term life insurance is not suitable only for covering funeral expenses. What you want in that case is called “Final Expense insurance” or “Burial insurance”. Final expense or burial insurance policies are usually worth between $10,000 and $20,000, just enough to cover the cost of a funeral. Their premiums are significantly lower and they don’t require Medical exams.

By comparison, term life insurance still offers significant coverage usually in increments of $250,000 which means you have to take a medical exam, you have more coverage than you need for final expenses, and your premiums are going to be higher as a result of the higher coverage.

How Much Does Term Life Insurance Cost?

Term life insurance has different costs depending on factors like:

• How long your term is; longer term lengths have higher premiums
• The coverage amount; the higher the amount, the higher your premiums
• Your age and gender; older individuals will pay more for term policies because of their increased health risks
• Your job; dangerous jobs come with higher risks and therefore, higher costs.

20-Year Term Life Policy: Average Monthly Premiums

Below is a table indicating the average monthly premiums for a 20 year policy with $500,000 coverage amounts and $1 million coverage amounts based on different ages and genders:

30-Year Term Life Policy: Average Monthly Premiums

The average monthly premiums for 30-year term life insurance policies are slightly higher because they cover a longer period of time.

Below is a table indicating the average monthly premiums for a 30 year policy with $500,000 coverage amounts and $1 million coverage amounts based on different ages and genders:

Types of Term Life Insurance

There are several types of term life insurance policies available to you, each of which have advantages and disadvantages, based on circumstances.

Level-Term Life Insurance

level term life insurance is a basic form of life insurance. If you talk to an insurance agent about a term insurance policy, they are likely talking about a level term policy.

Level means the same, so your premiums and your coverage amount remain the same throughout your term. if you outlive the policy, it expires and you no longer have to make payments but you will have to take out a new policy if you want continual coverage. If you pass away during the term, your beneficiaries receive the death benefit.

Pros:

• Your premiums remain the same, so you can budget accordingly.

Cons:

• The coverage expires when the term ends.

Yearly Renewable Term (YRT) Policy

If you don’t want your policy to expire should you outlive it, you can choose a renewable term policy. This is one of the most popular term policies for 20-year terms.

As the name suggests, it gives you an opportunity to renew your policy for additional terms until such time as you meet a specific age or health factor that serves as grounds for cancellation.

Some of these policies are also convertible which means once a term expires, you can opt to convert to a permanent plan.

Premiums for these are typically based on your age and health when you first take out the policy and they remain level (meaning, the same) until you renew, at which point your premiums get changed based on your health and age once more, before continuing to remain level for the duration of your term.

For example:

Carol takes out a 20-year renewable policy at age 38. She is healthy with only a mild case of asthma. Her premiums are $41 per month. They remain that way for 20 years. When she reaches 58, she decides to renew her term coverage for another 15 years. This time she has developed diabetes, dealt with clinical depression, and still has asthma. Combined with her older age, her monthly premiums are now $88, but they will remain that way for the next 15 years.

Pros:

• You can continually renew until such time as a policy gets rejected for health or age factors.
• With some policies you can convert to a permanent policy without having to go through the process of providing evidence for a brand new insurance policy.

Cons:

• Most insurance companies won’t sell this option to you if the term expires after your 80th birthday.

Decreasing Term Policy

A decreasing policy is a type of renewable term life insurance policy where your coverage amount decreases throughout the term. This is the best policy for people who have a specific cost they want to cover for their loved ones in the event that they pass away unexpectedly.

People who, for example, have a business loan or a mortgage might take out a term policy to cover the length of time left on that loan but then choose a decreasing term policy so that the available amount remains consistent with the decreasing balance of the mortgage or business loan.

Pros:

• This is the best way to ensure you have enough money to cover specific costs should you pass away unexpectedly, like a decreasing mortgage.

• This is a viable option for small business protection or personal asset protection.

Cons:

• The coverage decreases with time, but the premiums don’t.

• Because coverage changes, the premiums are less, on average, than other term policies.

Return Of Premium

Some life insurance policies provide a return of premium option. These are typically much higher in terms of the monthly premium and you have to keep the policy for the entire term or you forfeit that benefit. However, if you outlive it, the insurance company will return the premiums you paid.

This is another great option for people who want to cover a specific financial asset like a mortgage or business loan, car loan or credit card debt, but if they manage to pay it off during the time frame and out live their policy, can get their premiums back.

Pros:

• You get your premiums returned at the end of your term.

Cons:

• The premiums you pay are higher than other term policies because there is the payback option.
• You must stick with the entire term, without missing payments, or you forfeit the return.

Group Life Insurance

As the name suggests, group life insurance is a form of temporary insurance for several people within the same group.

You usually only get this as a benefit to your employment. employers might provide base term life insurance at no additional cost for you but allow you. 26% of Americans think the base coverage provided by their group life insurance is adequate.

Pros:

• In some cases you are allowed to purchase supplemental coverage in addition to what your company provides.
• The cost is relatively inexpensive compared to individual plans because there are so many people involved.

Cons:

• If you leave the company you no longer have access to that coverage and you’ll have to apply all over again.
• You can’t buy it yourself, it has to come through an employer.

What Are the Pros & Cons of Term Life Insurance?

Term life insurance, like all policies, is not meant for everyone and has some advantages and drawbacks. 44% of families in America would face extreme hardship within 6 months if they lost one of their two incomes, 25% would struggle within 1 month. But knowing whether term insurance is right for you can help offset that risk.

Benefits of Term Life Insurance

Easy to Manage

One of the biggest benefits is that it’s an easy policy to manage. If you are concerned about the right type of coverage and you don’t want to deal with a savings account, investment account, or market fluctuations, this policy provides a simple death benefit if you die within the term as long as you pay your premiums and nothing more.

Affordable

Term policies are more affordable compared to whole life insurance. Nearly half of Americans overestimate the cost of life insurance thinking that it’s at least three times the actual cost. So term life insurance provides a budget friendly premium.

More Coverage

Term policies usually let you buy higher levels of coverage, 10 million or more.

Tax-Free

The IRS does tax the lump sum return of premiums in most cases. Your beneficiaries usually get a tax-free death benefit too.

No Cancellation Penalties

In most cases, with the exception of things like return of premium policies, if you decide to cancel at any time you can do so without penalty.

Drawbacks of Buying Term Life Insurance

No Cash Value

Term life insurance doesn’t have any type of savings account against which you can draw money. there’s no cash value to be gained over the life of your policy.

Temporary Coverage

Term life insurance is temporary. It might not be the best option for people who want to cover funeral expenses or have a special needs child who needs constant care. By comparison it’s a great option for people who want to cover temporary expenses like a business loan or mortgage.

Upper Age Limit

With term life insurance policies there are upper age limits at which point you won’t be able to purchase 30-year, 20-year, or even 15-year plans.

Term Life Insurance vs. Permanent Life Insurance

48% of homes in the US have term policies; it is the most popular choice. But how does it compare to permanent life insurance?

Cost of premiums

The cost of premiums for permanent life insurance are significantly higher compared to term life insurance because the policy never expires so once you are locked in, you’ll have coverage until your beneficiaries need the death benefit.

Availability of coverage

Permanent life insurance has several options just as term life insurance does but several permanent policies come with an investment option where you can have a cash value account.

You also have wider coverage for different ages so if you are a senior you can take out a permanent life insurance policy where you might be limited in the length of a term policy available to you.

Investment value

As mentioned, you get an investment option when you get permanent policies and this can be quite useful while you are still alive but with term policies you don’t.

Who it is best for

Permanent life insurance policies are best for people who want to ensure there is a permanent death benefit available to their beneficiaries when they pass away no matter when that happens. This can be great for an estate that needs to provide an inheritance to a child where another child might be receiving a family business or a home. It’s also good for people who want to ensure there’s money left behind for their family to live comfortably when they pass.

Term life insurance is better for people who want to ensure there’s coverage in the event that they pass away during a specific term, usually correlated to existing, though temporary, financial obligations like a mortgage.

Term Life Insurance or Whole Life Insurance: Which Is Better?

What about whole life insurance? Which is better for you? Term and whole are the two most common life insurance types. Whole life insurance is a permanent plant so as long as you pay the premiums, it covers you until your death. Term, however, is set for a term then it expires.

You need to review your needs in obtaining life insurance to figure out which is better for you.

Term Life Insurance vs. Convertible Term Life Insurance

Convertible term life insurance is a slightly more expensive version of life insurance because it gives you the option of converting your expiring term policy into something else.

Cost of premiums

Convertible term policies are more expensive because you can change your policy into a permanent policy at the expiration without reviewing your health qualifications. Avoiding the medical exam and any health findings at the time of conversion is a cost built into the convertible premiums.

Note: When you convert to a permanent policy, your premiums will still go up even further because permanent life insurance is more expensive than term.

Availability of Coverage

With term life insurance you can choose term lengths ranging between 1 and 30 years on average.

By comparison, convertible life insurance has some limits on available coverage based on your age when the policy is started. For example:

• Until the age of 49, you can choose a 30 year convertible term.
• Until age 54, you can usually only choose a 20 year or less policy.
• Until age 57, you might only qualify for a 15 year term policy.
• Until the age of 62, you might only qualify for a 10 year policy.

Investment value

Convertible term policies will offer an investment value like a cash value account once they convert to a permanent policy, whereas term policies never do.

Who it is best for

Convertible term policies are best for people who A) have financial obligations in the present which they want to cover and B) want to change their policy after financial obligations have been met with a permanent plan.

For example:

Anthony has a mortgage, student loans, and a car loan. He picks a convertible term policy so that the term is $1,000,000, enough to cover all of that.

When it expires, he converts it into a permanent policy for $500,000, enough to give each of his kids a small inheritance, while his wife keeps the other assets (now paid off), once he passes away.

Now take the same example but slightly modified:

Anthony has a mortgage, student loans, and a car loan. He picks a 20-year term policy so that the term is $1,000,000, enough to cover all of that.

When it expires, he does not have any additional expenses, nor does he have children for whom he is providing an inheritance. His spouse will keep the house, other benefits from his successful business, and assets.

Term Life Insurance vs. Convertible Term Life Insurance: Which Is Better?

If you plan on having a different policy for other needs after financial obligations are paid, convertible term is better.

What Happens When Term Life Insurance Expires?

What happens when your term life insurance policy expires is based on the type of policy you have. Usually a notice will be sent from your insurance provider letting you know that your policy is no longer in effect. You don’t have to pay your premiums anymore, and you don’t have a death benefit available to you.

Do You Get Your Money Back at the End of a Term Life Policy?

Generally policyholders only get their premiums back if they purchased a return of premium term policy. Otherwise you don’t get any money back at the end of your policy.

What Happens if You Outlive Your Term Life Insurance Policy?

If you outlive your term policy, it expires. if you happen to purchase a renewable policy, you’ll have the option of renewing. if you bought a convertible policy you’ll have the option of converting to a permanent or whole life insurance policy at the end. Otherwise, should you want to provide a death benefit to your family, you’ll have to take out a new policy all over again.

Who Should Consider Term Life Insurance?

Several scenarios are better suited for term life insurance:

1. If you are young and want to ensure there is financial protection to cover specific debts like a mortgage or car which will expire at some point.

2. If you want to provide money for your family to live on during their grief and cover funeral costs.

3. If you are still raising a family or have other financial dependents and want to provide for them.

However, if, for example, you have a special needs child who is solely dependent upon your income for at-home care services, a term policy might not be adequate enough.

For example:

Markus is 40 years old. He purchases a 10-year, $500,000 term life insurance policy with a $50 monthly premium.

In this scenario, his premium will be relatively inexpensive because it is a short term and he is young. His premiums should not change during his policy either.

• If he passes away during the 10 years, his family will receive the $500,000 death benefit to cover the remaining financial obligations.

• If he outlives it, his term will expire. Then he will have to get a new policy, term or whole, but with higher rates because he is now 50.

Note: Markus’ financial obligations may have changed drastically during those ten years, with a home paid off, no more credit card debt, and full ownership of his cars. So a term policy could have been adequate enough to give him peace of mind while those obligations were still being met.

Can Seniors Get Term Life Insurance?

Yes, seniors can get term life insurance. In fact, at a certain point given your age and health, you might not be eligible for permanent policies in which case you’ll have no recourse but to pick a term policy.

As a senior your prices will go up for monthly premiums depending on the coverage and the length of your term. The table below shows different average premiums for seniors:

When comparing two adults of the same age with the same health problems, the average premium for a male term policy of 15 years with $500,000 in coverage is well over $1,000 per month but comparatively for women is only over $700 per month.

How Much Term Life Coverage Do You Need?

It can be difficult to figure out how much life insurance you need but in general you should be able to cover any long-term financial obligations as well as any additional funding you want to provide for your beneficiaries.

The median coverage amount for term life insurance policies is $110,000.

Add up things like:

• Mortgages
• Business loans
• Car loans
• Credit card debt
• Student loans
• Any money you want to leave for children’s education
• Money you want to leave behind to live off of

How Long Can Term Life Insurance Policies Be?

Life insurance policies can be chosen for several terms and you want to pick a term that corresponds to any of the financial obligations you want to cover.

Picking a Term Life Insurance Length

Term years range between 1 year and 30 years. You want to pick a policy length based on:

• How long you have financial obligations
• When you would want your family to be able to pay things off

For example:

Gary owes $117,000 on his mortgage. One of his daughters is currently in college at a cost of $20,000 per year. He is helping her pay for some of that. Another daughter is in high school but is actively involved in sports which comes out of the cost. He owes $5,000 on his car and $7,000 on his wife’s car.

His mortgage should be paid off in another 10 years. his first daughter should graduate in 2 years. His second daughter will graduate high school in one year and College in 5 years. Both car payments should be covered within the next 4 years.

In this case Gary could take out a 10-year Term Policy and know that it would be enough to cover all of those costs should he pass away unexpectedly before the financial obligations are met.

Is It Worth Having Term Life Insurance?

Term life insurance is worth having if you have finite costs that you know will expire such as a mortgage, car payment, credit cards, or other debt. It’s a great way to ensure you have insurance on the off chance that you pass away unexpectedly during that time frame.

If, instead, you want life insurance as a guarantee and you aren’t taking it out just to help your family cover costs like a mortgage in the event of your unexpected death, then a permanent policy would be a better option.