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What Is Term Life Insurance?


Life insurance offers your family and loved ones protection against any of your financial obligations after you’ve passed away. Though there are multiple forms of life insurance, term life policies provide your beneficiaries with a death benefit if you die during the policy’s term. But these policies vary in price due to factors such as age, health, insurance company, policy size, policy length and more. Below, we tell you what you need to know about term life insurance. If you’d like professional assistance with your insurance, consider using our free financial advisor matching tool.

How Term Life Insurance Works

Term life insurance offers policyholders and their beneficiaries financial protection for specific periods of time. With terms ranging from 10 to 30 years, these policies only provide death benefits if the policyholder dies within the life of the term. This means that any chosen beneficiaries will not receive a payout if the policyholder dies after the term expires. But often you can renew the policy after it expires, or you may be able to convert it to a permanent life insurance policy. If you’ve purchased return of premium life insurance, you’ll get your money back once the term ends.

When it comes to selecting beneficiaries, you can typically choose a person, multiple persons, a trust or estate, a charitable organization or a business. In the event of your death, your beneficiary will receive the face value of the policy you purchased. For instance, if you buy a 30-year term life policy with a face value of $500,000, and you pass away during the term, your insurer will pay your beneficiary the full death benefit of $500,000 as a lump sum.

Types of Term Life Insurance

Now that we’ve established a broad understanding of term life insurance, it’s important to look at the different variations of these policies. There are six types of term life insurance.

  • Level life term insurance: Level life term policies come with fixed premiums, meaning your insurance costs won’t increase or decrease throughout the life of the term. Term periods for these policies generally range from 10 years to 30 years.
  • Return of premium life insurance: Return of premium life insurance policies come with higher premiums, but they allow policyholders to get back their money at the end of the term.
  • Annual renewable term life insurance: Also known as yearly renewable term life insurance, these policies allow you to renew every year for a specific period of time. However, the insurance premium will increase every time you renew the policy.
  • Decreasing term life insurance: This form of insurance is similar to level life term insurance in that it comes with fixed premiums. However, the benefit amount decreases on an annual basis until the policy expires.
  • No-medical-exam term life insurance: Though these policies require higher premiums, they allow policyholders to bypass the medical exam requirement.
  • Modified term life insurance: These plans come with premiums that change over time. So the payments for these policies could increase or decrease, although the coverage remains the same.

Life Insurance Riders

What is term life insurance?

Life insurance riders are benefits designed with input by insurance companies’ actuaries and that you can add to your term life policy. They offer additional financial protections for things like policy conversions, disabilities and long-term care. We explore some of the most common insurance riders below:

  • Term conversion rider: Term conversion riders are normally included with your term life policy. These riders allow you to convert your term life policy into a whole life policy once the term life plan has expired.
  • Return of premium rider: Though these riders come with higher monthly premiums, they ensure that you get your money back if you outlive your policy.
  • Child insurance rider: You can only insure children aged 18 years or younger with this rider, but it covers you if the death of a child occurs.
  • Accelerated death benefit rider: This rider pays you the death benefit early if you develop a terminal illness with a short life expectancy.
  • Guaranteed insurability rider: Guaranteed insurability riders allow you to renew policies without indicating proof of insurability.

What Term Life Insurance Costs

Many factors affect how much you’ll spend on your term life insurance. This includes age, gender, health, policy size and policy length. When it comes to age, many insurers charge less for younger policy holders because there is a lower probability that you’ll die during the policy’s term. However, as you get older, your premiums will likely increase in cost. As for health, smokers pay notably higher premiums than non-smokers, and people with severe medical histories will also likely pay more than those with a clean medical slate.

Gender also affects how much you’ll pay for term life insurance. Males will typically pay more than women since women tend to have longer life expectancy. Therefore, there is a higher chance that women will outlive their policies, resulting in no payout if that is the case.

Your policy size (face value) and policy length also affect your monthly premium. For instance, a 10-year $100,000 policy will cost you significantly less than a 10-year $1 million policy. However, a 20-year policy with the same face values will cost a bit more.

See our guide on term life insurance quotes.

Term Life vs. Permanent Life 

The names of both forms of life insurance indicate one of their biggest differences – one is for a fixed period of time, while the other covers you for life. Also known as whole life insurance, permanent life insurance costs more than term life insurance. This is mainly because whole life policies also offer users cash value throughout the duration of the policy. With cash value, policyholders can contribute tax-deferred savings to their plan. These savings can accrue interest over time, or they can decrease in value.

Should You Buy Term Life Insurance?

Term life insurance is great for those in need of an affordable financial safety net. If you’ve got several financial obligations, you can protect your loved ones and dependents from covering those costs after you’ve died. In addition, term life policies come with lower monthly insurance premiums, so this insurance could be great if you’re looking to keep a steady budget.

The only catch is that term life policies only cover you for specific periods of time, and your beneficiaries won’t receive the death benefit if you die after your policy has expired. They’ll only receive a payout if you pass away before the policy ends. However, if you think you’ll outlive your current policy, you can typically renew it, but this will result in a higher monthly premium.

Bottom Line

What is term life insurance?

As you prepare your family for your death, consider term life insurance. You can only purchase these policies for fixed terms, and though they include more affordable monthly premiums, your age, gender, medical history and policy face value will ultimately determine how much you’ll pay on a monthly basis. This coverage differs from whole life insurance because it only provides protection for 10- to 30-year terms.

Whole life insurance is much more expensive, but it offers a tax-deferred savings feature and a lifetime of coverage. It’s wise to consider which form of life insurance best aligns with your long-term financial goals.

Insurance Tips

  • A financial advisor can provide valuable guidance as you consider what kind of insurance to buy. If you don’t have a financial advisor yet, finding one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Sometimes figuring out how much life insurance you need is a bit confusing, especially as you consider possible primary and contingent beneficiaries and possible debts or costs that will arise after you die. A free, easy-to-use insurance calculator can give you a good sense of what you need.

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