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Term life insurance

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Key takeaways

  • Term life insurance lasts a set duration, typically 10–30 years.
  • Term policies are generally three times cheaper than permanent life insurance.
  • 99 percent of term policies don’t pay out due to lapsed payments.

Term life insurance offers a budget-friendly solution for those seeking financial protection during pivotal moments in life. By forgoing the cash value component present in permanent life insurance, term life delivers straightforward coverage for a set duration. 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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What is term life insurance?

Term life insurance is a type of life insurance policy that lasts for a predetermined number of years rather than your entire life. When purchasing a term life policy, you’ll choose a policy term, most commonly between 10 and 30 years.

To help understand how term life insurance works, imagine you purchase a 10-year term life insurance policy. During that decade, you would pay your monthly or annual premium on time. If you were to pass away within that 10-year period, your beneficiaries would receive the policy’s death benefit.

If the insured does not pass away within the policy term and the coverage expires, the policy would end and the beneficiaries would not receive a death benefit when the insured passes away. However, there are exceptions to this scenario. Many of the best life insurance companies offer specialized riders, like conversion and return-of-premium riders, that tweak the way term life insurance policies work. If you are purchasing term life insurance, you may want to speak with your agent about what riders are available for your specific policy.

Advantages of term life insurance Disadvantages of term life insurance
Typically cheaper than permanent life insurance No cash value component or investment potential to build wealth
Conversion and return-of-premium riders may add flexibility and peace of mind Only covers a specified time period
Gives families the ability to cover significant financial liabilities that will eventually expire after a set period of time, such as mortgages and tuition Sunk cost if you outlive the policy

Advantages of term life insurance policies

When choosing life insurance, it’s important to know how term and whole life insurance policies compare. Term life insurance has a couple of key advantages that make it an attractive option for those who need a larger death benefit for a specific period of time. It is typically the cheapest type of life insurance, especially for younger people or new parents. The larger death benefit at a reasonable price can provide for children or dependents if something happens to the parent(s) earlier than anticipated.

Many financial planners advise individuals to invest the savings they get from choosing term life insurance over the costlier permanent life insurance. For policies with level premiums, the cost will not increase with age for the policy’s life as it does with some other life insurance options.

Learn more: Compare life insurance quotes

Disadvantages of term life insurance policies

Term life insurance does have a few limitations to keep in mind. For example, term life insurance policies pay out a death benefit when the insured passes away, but these policies do not include a cash value account. Whole life insurance policies, on the other hand, typically include a cash value account that may accumulate limited interest and capped returns. Some permanent life insurance policyholders use their cash value accounts to build wealth, but that option does not exist with a term life policy.

Another potential downside to having a term life insurance policy is that it only remains in effect for a certain period of time. Because policyholders can outlive their policies, there’s a chance that the death benefit will never be paid out. In fact, a study done by Penn State University indicates that 99 percent of all term policies never pay out a death benefit. However, that’s because most term policyholders don’t pay their premiums and let their policies lapse, not because they outlive the policy term, according to Entrepreneur.

Learn more: Best term life insurance companies

Types of term life insurance

There are several different term life insurance options, and some offer more guarantees than others. Usually, the more guarantees the policy offers, the more expensive the policy is. Here is a breakdown of the major types of term life insurance policies:

  • Level term insurance: This offers fixed premiums and a fixed death benefit for the policy duration, typically ranging from 10 to 30 years.
  • Decreasing term insurance: Aimed at covering diminishing debts like mortgages, a decreasing term policy’s death benefit decreases over time, making it relatively cheaper.
  • Guaranteed renewable term insurance: This policy type has renewal without needing a fresh medical exam, but premiums may increase with each renewal. A version of this is the yearly renewable term.
  • Convertible term insurance: A convertible term policy can change into a permanent life insurance policy if you outlive the term, without the need for a new medical exam. Premiums or death benefits adjust based on age at conversion.

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 three riders that are available for term life insurance:

  • Child term rider: This is only available for term life insurance policies. A child term rider provides coverage if your child passes away before a certain age and would pay out a death benefit. Additionally, this rider enables the term policy to be converted to a permanent policy without needing a medical exam.
  • Return of premium rider: For an additional fee, 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 your retirement age.

How much does term life insurance cost?

Term life insurance premiums are calculated based on the age and health of applicants. Because of this, pricing for a term life insurance policy varies but is typically significantly cheaper for younger applicants. Keep in mind that age and health are the main determinants of your premium, though you may still see some variance if you get quotes from multiple life insurers.

Comparing life insurance companies may be most helpful when you focus on what type of policy riders are available, how positive the customer satisfaction may be or what the insurer’s financial strength ratings are compared to other insurers.

Learn more: Affordable life insurance companies

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. Paying premiums without receiving a death benefit is one of the potential disadvantages of purchasing term life insurance. A return-of-premium rider would increase the cost of your term life insurance, but would allow you to recoup a portion or all of your paid premiums. If you want to receive money back in the event that you outlive your policy term, you may want to discuss this option with your life insurance agent.

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 15-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 breadwinner? 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 disabled family members?
  • 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. 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.

Frequently asked questions

    • At the end of a term life insurance policy’s term, most plans will expire; however, policyholders may have the option to either renew the policy for a predetermined term of their choosing or convert the policy to a permanent plan, if they have elected these options at the onset of their policy. While letting the plan expire in most term policies means losing the money paid into premiums, some providers offer “return-of-premium” options that allow people to pay higher premiums in exchange for the option to have some or all premium payments returned if they outlive their term.
    • While it is possible to take out a life insurance policy on someone else, there are some stipulations. For instance, there must be insurable interest between the person purchasing the policy and the person being insured, such as business partners, spouses, parents or children. The person purchasing the policy must prove that the death of the insured person would have an adverse financial impact on them. Additionally, the insured person would also need to provide their consent, as you cannot take out a policy on someone without their knowledge or agreement.
    • Choosing a life insurance beneficiary is a personal choice. Many choose spouses, children, parents or a trust for the benefit of a family member to be their life insurance beneficiaries, but no rules dictate that these are your only options. Your life insurance beneficiary doesn’t have to be a person at all — you can choose to list a church or charity as your beneficiary if you wish. One of the most important things when selecting a life insurance beneficiary is remembering to do it. Forgetting to name a life insurance beneficiary can cause financial hardship for the person (or people) you thought would be collecting your death benefit.
    • Term life insurance provides financial protection for a specific period, often aligning with life’s significant milestones, such as paying off a mortgage or raising children. It’s generally more affordable than permanent life insurance, making it a popular choice for many. Whether it’s worth it depends on individual needs and financial goals. People seeking temporary coverage without the need for a cash value component could find term insurance suitable. Always consult with a financial advisor or licensed life insurance agent to determine the best fit for your situation.
    • Timing when to end term life insurance often aligns with personal financial milestones and the policy’s purpose. Many choose to maintain their policy until major obligations, like raising children or paying off a mortgage, are complete. By retirement, some individuals find they no longer need the coverage as dependents are self-sufficient and significant debts are cleared. Overall, the decision comes down to the individual’s larger financial picture and responsibilities.

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