Term life insurance provides your beneficiary with a death benefit in the event you pass away during a specified period. In most cases, a term life insurance policy lasts between 10 and 20 years, although they can go as long as 30. When the period expires, you can either renew your policy, let it expire or convert it to permanent life insurance.
Although you don’t receive any type of refund or payment if you don’t pass away during your policy term, this type of life insurance is meant to provide a financial cushion for your family in the event you pass away. The death benefit funds could help pay off your mortgage or cover your kids’ college education.
How does term life insurance work?
When you buy term life insurance, you’ll have to decide two big things:
- How long the term should last
- How big your policy’s death benefit will be
For most people, a term life insurance policy will last 10, 15, 20 or 30 years — long enough to carry them through supporting dependents, paying off loans, or fulfilling other big financial obligations. The second part of the equation, finding the right death benefit, is a little more complicated.
Choosing a death benefit is highly personal. The lump sum should be enough to cover final expenses, debts, and support for dependents — but not too much because a bigger death benefit means higher premiums. When you’re ready to buy a policy, your life insurance agent will help calculate the right coverage limit to fit your needs. If you’re having trouble settling on a company, we recommend speaking with an independent agent who works with a few different providers and can give advice without putting the hard sell on just one.
Pro tip: To compare term life prices online, you’ll have to give a death benefit amount during the quote process. We recommend starting with a ballpark estimate from an online life insurance calculator if you’re not quite ready to speak with an agent and get an official number.
Types of term life insurance
You can typically choose from two types of term life insurance: level term (the most common) and decreasing term. With a level term policy, the death benefit amount will be the same regardless of when the death occurs. So even if you’re older and towards the end of your policy when you pass away, your beneficiary will still receive the full amount.
On the other hand, decreasing term means that the death benefit amount decreases as time goes on. This is much less common today as most people opt for a level term.
Pros of term insurance
Term life insurance comes with several benefits, notably that it’s usually the most affordable option. You can also choose the exact length of time you want coverage so you’re not overpaying. Many people opt to get coverage for the length of time it takes their children to grow up and leave the nest. Others choose how long it will take them to pay off their mortgage so they don’t leave excessive debt behind for their loved ones.
Another pro is that you can choose the exact amount for the death benefit. You can calculate debts and other expenses you want to take care of so that your premium isn’t more expensive than it needs to be.
Cons of term insurance
There are also a few downsides to choosing life insurance. The first is that it doesn’t last your entire life. When your policy term ends, you can renew or take out another policy. But your premium will be much more expensive because of your age. Term life insurance also doesn’t accrue any cash value. That means the only way to get any of your premium money back is through the death benefit. While it’s great that you live to the end of the term, there’s no repayment for the years you paid for coverage.
How Much Does Term Life Insurance Cost?
Like all things life insurance, premium costs for term life are highly dependent on who you are. Consider a policy worth $250,000. A young , healthy person (read: 20s to mid-30s) will likely pay under $20 per month for this coverage. Someone slightly older (think 40s to 50s) could pay between $35 and $85 per month. And for a tobacco user or someone with a pre-existing health condition, premiums can be twice as expensive, or even more if you’re older.
Age and health are the two biggest factors that go into determining life insurance prices. Still, there are proactive steps you can take to lower your premium. See our guide to term life insurance for tips and tricks to help reduce your rates.
It’s worth noting that term life insurance rates also vary by company. Every insurer has a different underwriting process, which means they’ll weigh your personal “risk factors” a little differently and set prices accordingly. For instance, one company might have favorable prices for seniors, while another might be a little friendlier toward diabetics. That’s why it’s so important to shop around, compare term life prices online, and look for the best deal on the life insurance coverage you need.
How to Select a Term Life Insurance Company
There are five essential qualities to look for when choosing a term life insurance company. You can learn about each factor in detail here, though we’ve summed up the list below to help you get started:
- Strong financial ratings from AM Best
- A positive customer service record from J.D. Power
- Flexible options for coverage and term lengths
- Options to renew your policy or convert to permanent insurance when the term is up
- Affordable rates for your unique situation
We’ve done a lot of that work for you and highlighted some standout choices in our review of the best life insurance companies. If you want to start on a wider playing field, you can also check out our ratings for the top 20 life insurance companies in the U.S., where we compile financial scores and customer service rankings all in one place.
About the Authors
Lauren Ward is a personal finance writer who regularly covers consumer insurance products. Her work has appeared in a variety of online publications, including Bankrate and The Simple Dollar. She graduated from Georgetown University with a BA in Japanese.