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Term life insurance is the most straightforward type of policy. It offers temporary coverage and pays a one-time lump sum to your beneficiaries when you die. Thanks to its lower premiums, it’s the best choice for shoppers who have financial dependents but only need life insurance for a specific period of time.
What's in this guide?
- What is term life insurance?
- How does term life insurance work?
- WATCH: Term life insurance explained
- Is term life insurance worth it?
- Get term life insurance quotes
- Term life insurance rates by age
- What term length should I choose?
- Types of term life insurance
- Pros and cons of term life insurance
- How to get a term life insurance quote
- Term vs. whole life insurance: which is better for me?
- Bottom line
What is term life insurance?
Term life insurance is a policy that provides protection for a set number of years — such as 5, 10, 15, 20, 25 or 30 years.
If you outlive your term, your coverage will expire and your beneficiaries won’t get any money. But if you die during your term, your loved ones will receive a one-time lump sum payment. This is known as the guaranteed death benefit, and you can decide how to allocate the funds between your beneficiaries when you sign up for a policy.
Who should consider term life insurance?
- You’re a parent and want enough coverage to get your kids through college.
- You have a lot of money left to pay on your mortgage or student loans.
- You’re the sole breadwinner of your family or one spouse stays home to take care of the kids.
- You’re the caretaker for an elderly or disabled family member.
How does term life insurance work?
- Pick a term you want to be covered for, like 20 years or until your kids graduate college.
- Choose your coverage amount, like the remainder of your mortgage.
- Add any extra coverage with riders, like the ability to convert to whole life.
- Pay annual or monthly premiums, typically the same amount for the life of the policy.
- Your family receives a payout to help cover expenses if you pass away while your policy is active.
WATCH: Term life insurance explained
Is term life insurance worth it?
If you have people relying on your income, a life insurance policy can ease the financial burden on your beneficiaries when you die.
Term life insurance is affordable and the payments stay the same, so it’s easier to fit into your budget. It’s designed to replace your income during the years your family needs it most, like when you’re paying off a mortgage or raising children.
Since it’s cheap and temporary, a term policy is a simple way to protect your loved ones if you were to die prematurely — which is the main purpose of life insurance.
Get term life insurance quotes
Term life insurance rates by age
If you’re between the ages of 25 and 40, a 20-year term life insurance policy worth $500,000 would average about $28 a month.
Prices shown in table are an average for 20-yer term for nonsmokers and should taken as a rough guide only.
What term length should I choose?
When you purchase a term life policy, you agree to pay premiums in exchange for coverage. The coverage lasts for a specific period of time, and 20 or 30 years are the most popular terms.
The rule of thumb is to choose a term that matches your longest financial obligation. That way, if you die prematurely, your policy will take care of the repayments. When you’re working out how much coverage to buy, consider:
- The length of your mortgage
- How long you want to cover your spouse for in the event of your death
- When your children’s needs will be the highest
- Your household income if one parent is staying at home or working less to take care of the children.
How much coverage do I need?
The amount of coverage you can buy varies between insurers. Depending on your income, assets and financial obligations, you could purchase a policy that’s valued anywhere from $10,000 to $10 million. If you die during your term, your beneficiaries will receive a death benefit that’s equal to the face value of your policy.
Let’s say you took out a 20-year, $250,000 term life policy. If you pass away while the policy’s in force, that $250,000 will be distributed tax-free among your beneficiaries according to your wishes.
Can I add riders to my term life policy?
It depends on your insurer. Most insurers offer the following riders for a fee:
- Accelerated death benefit rider. If you’re diagnosed with a terminal illness, this rider pays out part of your death benefit to cover your medical and end-of-life expenses.
- Critical illness rider. This add-on pays out a lump sum if you’re diagnosed with a critical illness specified in your policy, like heart disease or cancer.
- Conversion rider. This rider allows you to upgrade to a permanent policy, like whole life. If you want to convert your coverage, you’ll need to do it before a deadline — usually within the first five years of taking out a policy, or before you turn 65, 70 or 75.
- Disability rider. This rider kicks in to replace a percentage of your income if you become disabled and can’t work.
Types of term life insurance
There are various types of term life insurance. These include:
Pay the same amount for premiums every month or year.
Pay steady premiums, but the death benefit gradually decreases over time.
Usually supplemental, both premiums and death benefits rise every year.
Renews every year but increases in premiums for a set number of years.
Refund all or part of your premiums if you’re still alive at the end of your term.
Pros and cons of term life insurance
- It’s affordable. Term life insurance is the cheapest type of coverage, and your premium is typically locked in. The younger and healthier you are, the lower your premium will be. And you’ll pay the same amount for premiums every time.
- Policies are simple to understand. Permanent life insurance policies can be complicated, but term life has a clear purpose: to provide a lump sum payment to your loved ones when you die.
- Payouts are tax free. The payment to your beneficiaries won’t be taxed in most scenarios. Find out when you’d pay taxes on life insurance payouts.
- You could convert to whole life. Some providers offer a conversion option, which means you can upgrade to a permanent policy without taking another medical exam.
- You don’t always have to take a medical exam. Exam-free policies can be more expensive, but you won’t be denied coverage based on your health.
- You’re not covered forever. Your insurer will terminate your coverage at the end of your term. If you still need life insurance, you’ll have to purchase a new policy — usually at a higher premium.
- You have a fixed death benefit. Term life insurance is inflexible in that the coverage amount stays the same. If you want to top up your coverage, you may need to take out another policy.
- There’s n co cash value. These policies don’t become a cash asset over time or offer a return of investment.
How to get a term life insurance quote
Once you’ve decided on your term and how much coverage you want to buy, follow these steps:
- Get quotes from a handful of providers.
- Compare the quotes, including the policy features, premiums and available riders.
- Choose the company that best suits your needs and budget.
- Apply for coverage. Typically, this involves filling out a form with your personal, contact and employment details, as well as a questionnaire about your health, lifestyle and family medical history. Some insurers will require a medical exam, which can be scheduled at a time and place that’s convenient for you. During the medical exam, a technician will record your height, weight and blood pressure, and pass those details on to your insurer.
- Assess and adjust your coverage as needed. When your insurer comes back with a proposed policy, review it and request any changes.
- Sign off on your policy. When you’re happy with your policy and premium, sign your policy documents and designate your beneficiaries. You can nominate multiple beneficiaries and specify how the money should be divided between them.
Can I get coverage without taking a medical exam?
Yes. Many insurers offer term life policies that don’t require a medical exam, and some issue instant approval policies, which means your coverage could go into effect on the same day.
If you opt for a no-exam policy, just know your insurer might charge a higher premium to compensate for the risk. In most cases, you’ll still need to complete a questionnaire about your health and family medical history.
What happens when my term life policy expires?
When your term is up, you’ll no longer have coverage. Unlike permanent policies, term life insurance doesn’t last forever or accrue cash value over time. These are your options at that point:
- Purchase another term life insurance policy. If you still have financial obligations or people relying on your income, consider taking out another term life policy. You can expect to pay a higher premium now that you’re older. To help lower the cost, opt for a shorter term, such as five or ten years.
- Look into annual renewable term life insurance. If you don’t want to commit to a lengthy policy, you can take it year by year with annual renewable term (ART) life insurance. You won’t need to retake the medical exam or answer questions about your health.
- Do nothing. If you no longer have a need for life insurance, you can simply let your coverage lapse.
Term vs. whole life insurance: which is better for me?
For most people, term life insurance is enough to offer peace of mind and financial security for your family. Term life is the cheapest and most straightforward coverage, so it’s ideal for covering specific financial obligations over a set period of time, like a mortgage, student loans or raising children.
But if you want lifelong coverage, it’s worth looking into more permanent policies like whole life insurance. It’s much more expensive than term life insurance because there’s an investment component that builds cash value towards your policy you could withdraw. Whole life insurance is ideal for those who have complex or long term financial needs and want to treat their policy as a buildable cash asset.
Term life insurance offers predictable payments and protection for a set period of time. For these reasons, it’s ideal for those who have a specific need for life insurance and want cheaper coverage. But it doesn’t have a cash value, so if you survive the policy, you won’t get any money.
If you’re ready to purchase a policy to protect your family, take the time to compare life insurance companies.
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