Term life insurance
Key takeaways
- Term life insurance offers various types, each with different benefits and costs.
- Term life insurance is affordable, especially for younger individuals, but many overestimate its cost, deterring them from purchasing it.
- Exploring riders and regularly reviewing beneficiary designations can provide additional coverage and help ensure your policy aligns with your current needs.
Term life insurance offers a budget-friendly solution for those seeking financial protection during pivotal moments in life. Whether you’re navigating child-rearing years or tackling mortgage commitments, term life can be a reassuring safety net. Bankrate’s insurance editorial team breaks down term life insurance to help you better understand if this policy type is right for you.
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Whole life insurance combines life insurance with an investment component.
- Coverage for life
- Tax-deferred savings benefit if premiums are paid
- 3 variations of permanent insurance: whole life, universal life and variable life include investment component
Term life insurance is precisely what the name implies: an insurance policy that is good for a specific term of time.
- Fixed premium over term
- No savings benefits
- Outliving policy or policy cancellation results in no money back
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What is term life insurance?
Term life insurance is a type of life insurance policy that provides coverage for a predetermined number of years. When purchasing a term life policy, you’ll select a term length, commonly between 10 and 30 years. In contrast, permanent life insurance provides coverage for the insured’s entire lifetime (with a maximum coverage age ranging from 95 to 121) and typically includes a cash value component that grows over time. Some key roles in life insurance policies are:
- Policy owner: The individual who owns and controls the policy; responsible for paying premiums and making any changes to the policy.
- Beneficiary: The person or persons designated to receive the death benefit if the insured passes away during the policy term.
- Insured: The person whose life is covered by the policy. If the insured dies within the term, the death benefit is paid to the beneficiaries.
Term life insurance policies typically offer term lengths ranging from 10 to 30 years, with a few carriers offering 35- and 40-year terms. The death benefit amount can vary widely based on your needs and the insurer’s offerings, often ranging from $50,000 to several million dollars.
How does term life insurance work?
Understanding how term life insurance works can help you make informed decisions about your coverage. The process begins with underwriting, which finalizes the rate you pay for your policy. During underwriting, the insurance company evaluates your health, lifestyle and other factors to determine your risk level. This process typically involves a medical exam and a review of your medical history, although some policies offer no-exam options.
A quick example of how a term policy works: if you purchase a 10-year term life insurance policy, you have a fixed rate (premium) that you pay monthly, quarterly, semi-annually or annually throughout those 10 years. If you pass away during this 10-year period, your beneficiaries will receive the policy’s death benefit. If you outlive the policy term, the coverage ends — unless you choose to renew or convert your policy — and no death benefit is paid.
Beneficiary designations are an important aspect of term life insurance. You can designate primary and contingent beneficiaries. The primary beneficiary is the first in line to receive the death benefit, while the contingent beneficiary receives the benefit if the primary beneficiary cannot. You can name more than one beneficiary and specify the percentage of the death benefit each should receive. However, you must ensure the total adds up to 100 percent.
For instance, you might designate 70 percent of the death benefit to your spouse and 30 percent to your adult child. If you pass away during the policy term, the insurance company will distribute the death benefit according to these designations.
Pros and cons of term life insurance
Term life insurance offers specific benefits and drawbacks that can influence your decision when choosing a policy. Here are the key advantages and disadvantages of term life insurance to consider when searching for the best life insurance:
Pros of term life insurance
- Cost-effective: Typically the cheapest type of life insurance, especially for younger people or new parents.
- Larger death benefit: Provides a larger death benefit at a reasonable price, which can help support children or dependents if something happens to the parent(s) earlier than anticipated.
- Level premiums: For most policies with level premiums, the cost will not increase with age for the policy’s term, offering predictable costs.
- Targeted coverage: Ideal for covering significant financial liabilities that will eventually expire, such as mortgages and tuition.
- Riders for flexibility: Conversion, return-of-premium and child riders may add flexibility and peace of mind.
Cons of term life insurance
- No cash value: Term life insurance policies do not include a cash value component, unlike whole life insurance policies.
- Limited coverage period: Only covers a specified time period, meaning there’s a chance the death benefit will never be paid out if the insured outlives the policy term.
- Renewing is expensive: If you find you still need life insurance coverage after your term ends, you can usually renew it annually, but renewal premiums are significantly more expensive.
Types of term life insurance
When someone references “term life insurance,” they usually mean level term life insurance. However, there are several types of term life insurance, each designed to meet different needs. Generally, the more guarantees a policy offers, the higher the cost. Here’s a breakdown of the major types of term life insurance policies:
- Level term life insurance: Offers fixed premiums and a fixed death benefit for the policy duration, typically ranging from 10 to 30 years. This type provides stability, as both your premium and death benefit remain the same throughout the term.
- Decreasing term life insurance: Designed to cover debts that decrease over time, such as a mortgage. The death benefit decreases over the term of the policy, which makes this type of insurance relatively cheaper compared to level term life insurance.
- Renewable term life insurance: Allows you to renew your policy without needing a new medical exam, even if your health has changed. However, the premiums may increase with each renewal, reflecting your age and potential health risks at the time of renewal. A common version of this is yearly renewable term insurance.
- Convertible term life insurance: Lets you convert your term policy into a permanent life insurance policy without needing a new medical exam. This is usually done through a term conversion rider, but it’s commonly referred to as convertible term life insurance. This option allows you to secure lifelong coverage if your needs change. The rider is usually included on term policies at no extra cost; however, premiums will likely rise if you choose to convert since permanent life insurance costs more.
- Return of premium term life insurance: Includes a feature where, if you outlive the term of the policy, you get back the premiums you paid. This is achieved through a return of premium (ROP) rider. While this type of policy has higher premiums compared to regular term life insurance, it provides the added benefit of a refund if no death benefit is paid out.
Riders for term life insurance
A standard term life insurance policy may not cover certain events such as critical illnesses, financial protection for your loved ones after you pass, and more. A rider, also referred to as an endorsement, is an optional type of life insurance coverage that can be added to your existing policy. It can be beneficial to add a rider to cover some of the gaps in coverage in a term life insurance policy. Here are a few common riders that are available for term life insurance:
- Child term rider: This rider provides a small payout for all eligible children, including adopted and future children, for one flat cost. It covers children from as young as 14 days old until they reach a specified age, usually 18 or 25. Covered children can typically convert coverage to a permanent policy once they reach adulthood without needing a medical exam should they choose to do so.
- Return of premium rider: This rider ensures you receive back the money you paid into the policy if you don’t pass within the policy’s term. If the policyholder passes away before then, the money would be paid to the beneficiaries listed as normal.
- Waiver of premium rider: If you become critically ill, injured or disabled and cannot go to work, a waiver of premium enables you to pause your monthly premium until you’re able to go back to work. However, qualifying scenarios are determined by the particular insurer. Additionally, with this rider, you are typically only covered up to a certain age — usually the age of 65 in line with your retirement.
- Accelerated death benefit rider: This rider allows you to access a portion of your death benefit while you are still alive if you are diagnosed with a terminal illness. This can help cover medical expenses and other costs associated with a terminal illness.
- Accidental death benefit rider: This rider provides an additional payout if you pass away due to an accident. It increases the death benefit amount, offering extra financial protection for your beneficiaries in the event of an accidental death.
- Chronic illness rider: This rider allows you to access a portion of your death benefit while you are still alive if you experience a chronic illness.
How much does term life insurance cost?
Term life insurance premiums are primarily calculated based on the age and health of the applicants. Because of this, pricing for a term life insurance policy varies but is typically significantly cheaper for younger applicants. Age, gender and health are the main determinants of your premium, though you may still see some variance if you get quotes from multiple life insurers, as their underwriting practices can also vary.
Interestingly, many people overestimate the cost of term life insurance, which can prevent them from purchasing a policy. According to the 2024 LIMRA and Life Happens Barometer Study, about 72 percent of all respondents overestimated the true cost of a basic term life insurance policy. This misperception is particularly notable among younger generations: over half of Gen Z and Millennials combined overestimate the cost at more than three times its actual price. Additionally, over half (54 percent) of those surveyed said their life insurance cost estimate was based on “gut instinct” or a “wild guess.”
Understanding that term life insurance is often more affordable than many people think can encourage individuals to explore their options. Comparing life insurance companies can be helpful, especially if you have a pre-existing condition; it can also be beneficial to look at what types of policy riders are available, customer satisfaction and the insurer’s financial strength ratings. These considerations can help you find a policy that not only fits your budget but also helps to meet your coverage needs.
Will I get my money back at the end of my term?
Unless you purchase a return-of-premium term life insurance policy, you will not get any money back at the end of the term. However, it’s important to note that the purpose of most insurance policies is to protect against what-ifs so the function of term life insurance is not atypical.
To help put this in perspective, it can be helpful to think of a term life insurance policy like a home or auto insurance policy: you only get money if you make a claim, and ideally, that doesn’t happen. Just as you don’t expect to get your auto insurance premiums back if you don’t have an accident, you shouldn’t expect to get your term life insurance premiums back if you outlive the policy term.
However, a return-of-premium rider can be added to your policy at an additional cost. This rider ensures you receive back the money you paid into the policy if you outlive the term. While this option increases the cost of your term life insurance, it provides the benefit of recouping a portion or all of your paid premiums.
How much term life insurance do I need?
Deciding how much term life insurance you need hinges on your financial goals and specific situation. For instance, a parent of a young child may want to purchase a life insurance policy with a 20-year term. A term of this length could make the most sense as it could ensure that their child will be financially secure if the parent passes away while the policy is in place.
On the other hand, a childless couple with 10 years left on their mortgage may only want a term life insurance policy to be active while they are still paying off their home.
Some other factors to consider when determining your life insurance coverage needs include:
- What is your yearly income, and what are your expenses? How much room do you have in your budget for life insurance?
- Are you the sole earner? If not, does your spouse or partner make enough to cover your family’s current and future expenses if you aren’t there?
- How many children do you have, and what are their ages? Do you plan to cover their higher education costs?
- Are you a caretaker for any family members with disabilities or special needs?
- Do you have a mortgage or other debts? If so, how many years will it take to be debt-free?
- How much financial help would your spouse need to keep your home afloat if you passed away?
It’s essential to consider your coverage needs to keep your life insurance premium within budget. In terms of how much life insurance you need, if you carry too much coverage, you could find it challenging to keep up with your life insurance bill, putting yourself at risk of policy cancellation. If you don’t have enough coverage, your beneficiaries may struggle financially after your death. A life insurance calculator can help guide you on your life insurance shopping journey, as can a consultation with a certified financial planner or licensed insurance agent.
Is term life insurance worth it?
Term life insurance is usually the most affordable way to cover temporary needs, such as paying off debt, funding your children’s college education or replacing your income if you were to pass before retirement. Whether it’s worth it depends on your individual needs, budget and financial goals. Term coverage is usually the best fit if you don’t need the cash value component or permanent coverage that whole or universal life insurance provides. It can be beneficial to consult with a financial advisor or licensed life insurance agent to determine the best type of life insurance for your situation.
