How Does Term Life Insurance Work?
Term life insurance is a temporary form of life insurance and, by far, the least expensive type of coverage. You agree to pay regular premiums for a specified duration, and if you die, the insurer will pay your beneficiaries a tax-free cash benefit.
Every term policy will contractually stipulate that coverage will end after a specific number of years or upon reaching a certain age. When the policy terminates, you’re no longer insured, and no money is refunded (most of the time).
Most term life policies have a fixed price for the term’s duration. However, some term policies will have an automatic price increase, typically every five years.
How Long Does Term Life Insurance Last?
While it varies by company, term policies usually last 10, 15, 20, 25, 30, or 40 years. Alternatively, the policy may last until you reach the age of 75, 80, 85, or 90.
It’s very rare, but some insurers do offer a 1-year, annual-renewable term.
How Long Of A Term Can You Get Based On Age?
Your age will determine the length of the terms available to you. For example, if you’re 75 years old, a 10-year policy would be the longest term you can buy, whereas a 50-year-old could get a 20 or 30-year term. Below is a table outlining the general rules life insurance companies follow regarding term lengths by age.
| Term Length (In Years) | Typical Maximum Age For New Applicants |
|---|---|
| 1 | 50 |
| 5 | 80 |
| 10 | 80 |
| 15 | 70 |
| 20 | 65 |
| 25 | 60 |
| 30 | 55 |
| 40 | 45 |
Who Should Consider Term Life Insurance?
Term life insurance is the ideal type of life insurance for those who only need to cover a temporary problem, such as:
- You need mortgage protection coverage. Mortgages are temporary, so it doesn’t make sense to buy a permanent policy to cover a temporary debt. A term life policy is the ideal way to ensure that if you die, your mortgage can be paid off.
- Paying off other financial debts, such as credit cards or car notes.
- Replacing income when you’re a primary breadwinner at home and have minor dependents.
- You would like permanent coverage, but cannot afford it at this time. Term life insurance is very inexpensive, which means you can get a large policy for a very low price. In the future, when your financial situation improves, you can convert the term policy to whole life.
- Coverage while you’re paying for your children’s college expenses.
What Are The Disadvantages Of Term Life Insurance?
All financial products, including term life insurance, have their drawbacks. Truthfully, the disadvantages of term life insurance are minimal, but the main ones include:
- The coverage will eventually end. The insurer is betting that you will outlive the policy, which they know is 99% likely to be the case. They keep all the premiums you paid, and they pay out nothing.
- Underwriting can be strict. Term life insurance is very inexpensive because the insurance company knows, with virtual certainty, that you will not die while the policy is in force. Offering large amounts of coverage at a low cost creates a high level of risk for the company. Therefore, to offset this risk and maintain their financial solvency, underwriting must be strict to weed out unhealthy applicants. Essentially, they only want healthier people they know will statistically survive beyond the term of the policy.
- No cash value. While this is not necessarily a disadvantage, some people prefer cash value permanent life insurance due to the benefits it provides.
- Premiums upon renewal can be hefty. Some term life policies have an automatic renewal feature, where the company will issue a new term at a new price point without requiring requalification. In many cases, the price increases are massive and far exceed most Americans’ budgets, forcing them to drop the coverage altogether. One prominent pain point is that future renewal costs are not outlined in the policy, so consumers are unaware of what the future premiums will be. Sadly, they only find out the future cost when the time comes, and it’s too late to make a different choice.
How Much Does Term Life Insurance Cost?
Without a doubt, term life insurance is the least expensive type of life insurance. Whole life policies typically cost 2-10 times more than term life insurance, and universal life insurance costs roughly 2-5 times more than term life.
Term life insurance rates are calculated based on a variety of factors, such as the length of the term, age, gender, health history, coverage amount, nicotine and tobacco usage, lifestyle, and whether or not you take a medical exam.
10-year term
20-year term
30-year term
How Much Term Insurance Do You Need?
To determine how much term coverage you need, you need to first firmly establish all the reasons you need coverage. Ask yourself the question: If you died, what would the death benefit be used for? The answer to that question will establish all life insurance needs and thus can determine how much coverage to aim for.
The DIME formula is another good way to identify your life insurance needs. DIME stands for Debt, Income, Mortgage, and Education. Essentially, you add up all those variables to determine the total amount of term insurance you’d need.
As a real-world example, let’s say you want the money to be used to replace your income and pay off your mortgage.
- Step 1: Calculate your total income replacement. To do so, take your annual salary and multiply it by the number of years you would need. A common rule of thumb is to get at least 10 times your salary. If you make $50,000 annually, you would need $500,000 in coverage to replace your income for ten years.
- Step 2: Identify your current mortgage balance. If you currently owe $200,000 on your mortgage, then you’ll want at least that amount of coverage or something close to it.
- Step 3: Add the two amounts together. The $500,000 for income replacement and $200,000 for mortgage protection would yield a total life insurance amount of $700,000.
Life insurance calculators can be especially helpful in determining how much life insurance you need.
Types Of Term Life Insurance
While the options vary by insurer, there are many types of term life insurance, including:
- Level term: A fixed price and death benefit for the entire duration of the term. This is by far the most common type of term life insurance. It will sometimes be referred to as “level benefit term life insurance or “level premium term life insurance”.
- Decreasing benefit: The death benefit will decline in value at predefined intervals. Due to the decreasing benefit, the price is lower. Most of the time, this type of term life insurance is purchased to cover a mortgage, as the note balance will decrease over time.
- Increasing benefit: Although rare, these policies offer a death benefit that increases at regular intervals. Essentially, they are meant to offset inflation.
- Return of premium: A term policy with a “return of premium rider” added on stipulating that should you outlive the policy, the insurer will refund 100% of the premiums you paid. Please note that you cannot add this rider on after the policy is issued. You must make this election at the time of the initial application. Additionally, this rider will significantly increase the cost.
- Renewable: The policy will renew either annually (often referred to as “annual renewable term”) or every five years. Some companies will renew the policy automatically (such as Globe Life), where if you take no action, you’ll simply see the higher premium deducted from your bank account. On the other hand, some companies make the renewal optional, where you must explicitly agree to the renewal and the higher premium.
- Convertible: The policy contains a clause that grants you the right to convert to whole life insurance without having to show evidence of insurability. Typically, the conversion window is the first half of the term’s length. Also, when you convert, the premium increase will be substantial because you’re going from term to whole life insurance, and the premiums are calculated based on your age when you exercise the conversion. In the modern era of term life insurance, nearly every policy from every company will contain a conversion option.
- Group: A term life policy that you acquire through an employer. The terms and conditions of the policy vary by group and typically do not persist after you leave the job.
- Direct: Term life insurance that you buy directly from the insurance company online or via telephone.
Term Life Vs Whole Life
There are significant differences between term life and whole life insurance. Be sure to consider the key features of each type of policy when deciding which one is best for your budget, goals, and needs.
| Policy Features | Term Life Insurance | Whole Life Insurance |
|---|---|---|
| Length of coverage | Usually 10, 20 or 30 years | Forever |
| Fixed premiums | Often yes, but sometimes premiums increase over time | Yes |
| Affordability | Lowest cost | Highest cost |
| Guaranteed death benefit payout | Yes | Yes |
| Cash surrender value | No | Yes |
| Builds cash value | No | Yes |
| Policy loans | No | Yes |
| Potential payout of dividends | No | Yes |
| Medical exam required | Sometimes | Sometimes |
| Ideal reasons to buy | Temporary needs such as covering a mortgage or replacing income | Permanent needs such as paying for your final expenses |
Term Life Vs Universal Life
Like whole life insurance, universal life insurance is vastly different from term life insurance.
| Policy Features | Term Life Insurance | Universal Life Insurance |
|---|---|---|
| Length of coverage | Usually 10, 20 or 30 years | Forever |
| Fixed premiums | Often yes, but sometimes premiums increase over time | Yes & no |
| Affordability | Lowest cost | Always costs 2-5x more than term coverage |
| Guaranteed death benefit payout | Yes | Yes |
| Builds cash value | No | Yes |
| Cash surrender value | No | Yes |
| Policy loans | No | Yes |
| Potential payout of dividends | No | Yes |
| Medical exam required | Sometimes | Sometimes |
| Ideal reasons to buy | Temporary needs such as covering a mortgage or replacing income | Permanent needs such as estate planning or supplemental income for a surviving spouse |
What’s Required To Qualify For Term Life Insurance & How Do You Apply?
To qualify for a term life policy, you will need to fill out an application either with a licensed agent or online directly from the insurer’s website. At a minimum, you must answer health questions (there are no guaranteed acceptance term policies) and likely questions about your lifestyle.
Furthermore, you may or may not have to take a medical exam. It just depends on the company and the product you’re applying for. After the application is submitted, the insurer will conduct underwriting, during which the company will determine whether you’re approved and what the final price will be (if any changes have occurred).
In general, you’ll need to provide the following information:
- Personal information- Expect to provide your full name, date of birth, SSN, driver’s license number, and other pertinent personal data.
- Names of beneficiaries– You choose your beneficiaries. There is no limit to the number you can select. Additionally, you can establish both primary and contingent (backup) beneficiaries. All you really need to provide is their name and relationship to you. You generally don’t need any of their personal information.
- Answers to questions– You will definitely have to answer health-related questions and likely ones about lifestyle (tobacco, drugs, or alcohol usage).
- Payment information– Insurers require you to provide your payment information so that when the policy is issued, they can begin the billing according to your preferences. Nearly all insurers will only accept monthly payments via an automatic debit from a checking or savings account on a day you choose. Companies will rarely allow payments via credit card. Additionally, if your application is declined, the insurer will not debit money from your account. The only way you’ll see a deduction is if your application is approved.
- Select the death benefit and term length– You’ll define how long a term you want and the amount of coverage.
If you apply for a policy that entails taking a medical exam, the insurer will also order all your medical records. This process is called “fully underwritten” and typically takes 4-6 weeks for the insurer to complete the process and approve the application. If there is no medical exam, such as an instant life insurance option, approvals usually take less than a few business days.
Most companies will mail you a hard copy of the policy. However, it’s common today for insurers to provide you with digital access as well.
Frequently Asked Questions
Unless you have a term policy with a return-of-premium rider (which is very rare), you will not receive a refund of any premiums when the policy terminates. Some people tend to characterize this scenario as a “waste of money.” While it’s true in a sense, it does not accurately depict the value of term life insurance. Like car insurance, you’re paying for peace of mind. Your policy gives you comfort knowing that if you were to pass away, your family would be taken care of. If you outlive the policy, that’s a really good thing because it means you’re still alive! All those premiums you paid provided you with valuable peace of mind, which is worth the cost.
The insurance company keeps the money you’ve paid all those years because of the low cost. You paid a significantly lower premium on the basis that the insurer knows statistically (according to standardized mortality tables) that you are very unlikely to die while the policy is in force. The very reason why whole life insurance costs as much as ten times more than term life insurance is that a whole life policy lasts forever, which means the insurer will certainly pay out a death benefit one day.
You will never receive any money refunded to you when you cancel a term life policy. Only cash value life insurance policies (whole life or universal life) will have a surrender value that results in a refund when someone cancels.
Term life insurance policies don’t have cash value. However, some life insurance companies sell return-of-premium term life insurance that does indeed build cash value, but it’s very rare. Essentially permanent policies, such as whole life insurance, are the types of life insurance that accrue cash value.
Many term life insurance options don’t require a medical exam, but some do. It just depends on the company.
Some term policies have the option to renew (either automatically or by choice) at the end of the term, but not all of them. No two companies are the same. It’s wise to ask this question before you buy the policy. Additionally, if you already have a term life policy, review your policy to understand its terms and conditions.
Individuals with pre-existing health conditions can still qualify for term life insurance. It depends on the details of your health history, such as the specific conditions you’ve been diagnosed with, their severity, and your treatment history. That being said, it’s objectively true that term life insurance has far stricter underwriting than whole life or universal life policies. That’s because insurers take on extreme risk when they issue a term policy. They offer a substantial amount of coverage at an extremely low price. If a person dies while a term policy is in force, the death benefit the insurer must pay out will constitute a significant financial loss for them.
To counter this risk, the insurer must only accept healthy applicants who are very likely to outlive the policy. Here is a real-world example to illustrate the math behind the scenario. A 40-year-old woman (non-tobacco user) could obtain a $500,000 20-year term policy for $31.61 per month. That means the insurer will receive a maximum amount of $7,586.40 over the 20 years. If that woman died just one day before the policy ends, the insurer must pay out $500,000. That would be an enormous financial loss, which is why their risk is so extreme. To counter this risk, insurers typically only accept relatively healthy applicants, as they know that, roughly 99% of the time, they will outlive the policy.
- Nationally licensed life insurance agent with over 16 years of experience.
- Personal annual production that puts him in the top .001% out of all life insurance agents in the nation.
Anthony Martin is a nationally licensed insurance expert with over 16 years of experience and has personally served over 10,000 clients with their life insurance needs. He frequently authors entrepreneurial and life insurance content for Forbes, Inc.com, Newsweek, Kiplinger, and Entreprenuer.com. Anthony has been consulted as an expert life insurance source for dozens of high-profile websites such as Forbes, Bankrate, Reuters, Fox Business, CNBC, Investopedia, Insurance.com, Yahoo Finance, and many more.
- Nationally licensed life insurance agent with over 20 years of experience
- Best selling Amazon author.
Jeff Root is a nationally licensed life insurance expert with over 20 years of experience. He has personally helped over 3000 clients with their life insurance needs. Jeff is a best-selling Amazon author and the managing partner of a highly successful insurance brokerage that manages over 2,500 licensed insurance agents across the USA. He has been a featured life insurance source for prestigious websites such as Forbes, Bloomberg, MarketWatch, Nerdwallet, and many more.
- Nationally licensed life insurance agent with over 15 years of experience
- Best selling Amazon author of five insurance sales books.
David Duford is a nationally licensed insurance expert with over 15 years of experience. He has personally helped more than 15,000 clients buy life insurance. David has been featured as an expert source for highly authoritative publications such as A.M. Best and Insurancenewsnet. He also runs one of the largest Youtube channels to help aspiring insurance agents serve their clients better.
- Nationally licensed life insurance agent with over 20 years of experience
- Best selling Amazon author.
Jeff Root is a nationally licensed life insurance expert with over 20 years of experience. He has personally helped over 3000 clients with their life insurance needs. Jeff is a best-selling Amazon author and the managing partner of a highly successful insurance brokerage that manages over 2,500 licensed insurance agents across the USA. He has been a featured life insurance source for prestigious websites such as Forbes, Bloomberg, MarketWatch, Nerdwallet, and many more.
- Nationally licensed life insurance agent with over 15 years of experience
- Best selling Amazon author of five insurance sales books.
David Duford is a nationally licensed insurance expert with over 15 years of experience. He has personally helped more than 15,000 clients buy life insurance. David has been featured as an expert source for highly authoritative publications such as A.M. Best and Insurancenewsnet. He also runs one of the largest Youtube channels to help aspiring insurance agents serve their clients better.
Choice Mutual often cites third-party websites to provide context and verification for specific claims made in our work. We only link to authoritative websites that provide accurate information. You can learn more about our editorial standards, which guide our mission of delivering factual and impartial content.
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DIME formula. https://www.guardianlife.com/life-insurance/how-much-life-insurance-do-you-need
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at least 10 times. https://www.johnhancock.com/ideas-insights/how-much-life-insurance-do-you-need.html
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types of term life insurance. https://www.iii.org/article/what-are-different-types-term-life-insurance-policies
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fully underwritten. https://www.corebridgefinancial.com/insights-education/behind-the-scenes-of-life-insurance-underwriting
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mortality tables. https://mort.soa.org/
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Life insurance calculators. https://lifehappens.org/life-insurance-needs-calculator/
