Term life insurance offers a cost-effective solution for securing the financial future of your loved ones, making peace of mind more accessible than ever.
In this guide, we’ll explore everything you need to know, including how it works, its benefits, drawbacks, and tips for choosing the best life insurance policy.
What Is Term Life Insurance?
Term life insurance covers you for a set period, typically 1 to 40 years. If you die while the policy is active, the life insurance company pays the death benefit to your beneficiaries. It’s a straightforward policy designed to offer the highest coverage at the lowest price.
Key Features
- Fixed term lengths from 1-40 years
- Level premiums during the term period
- Guaranteed level death benefit
- Conversion privilege to permanent life insurance
- Life insurance riders to customize coverage
Term life insurance is a cost-effective option for families and individuals seeking coverage for mortgages, education expenses, or income replacement. It’s a great option for high-risk life insurance cases due to lower premiums than permanent coverage.
Why Choose Term Life Insurance?
Term life insurance has advantages and disadvantages when comparing it to universal or whole life insurance.
Advantages:
- Affordability – You get the most coverage for the lowest price.
- Flexibility – Choose the term length that best meets your needs.
- Simplicity – Term life is simple and easy to understand.
- Customizable – Riders are available to tailor your policy.
Disadvantages:
- Expiration Risk – You may outlive the term of your policy.
- No Cash Value – You get nothing back when your term ends.
- Renewal Price – Premiums skyrocket at the end of the term.
Evaluate your options carefully to select the policy that best meets your needs.
How Does Term Life Insurance Work?
Typically the process starts with requesting a life insurance quote, answering a few underwriting questions, and reviewing coverage and pricing options.
As part of this process, you’ll choose the best life insurance company, complete an application, and select your coverage amount and duration.
You’ll designate the owner and beneficiaries of your life insurance policy.
If you want to customize your policy, you can add life insurance riders, and even choose how death benefits are paid out by selecting the settlement option.
You’ll go through underwriting and possibly a paramedical exam, although exams are becoming less common as accelerated underwriting programs expand.
We now have companies that offer no-exam life insurance for $500k – $3 million.
Once approved and the policy has been accepted by you, the death benefit and premium you pay are locked in for the term length chosen. If you died from natural causes, health issues, or an accident, you’re covered.
We recommend our Life Insurance 101 guide if you need a quick application process overview.
What Happens At The End of The Term?
What happens to the policy at the end varies by life insurance company. Most policies are renewable to age 90-95 but each company handles it differently.
Ex. Female, age 45, preferred best rates, $1 million – 20-year term – What happens to the policy in year 21?
| Company | Death Benefit | Premium |
|---|---|---|
| Banner Life | Decrease | Increase |
| Corebridge Financial | Decrease | Increase |
| John Hancock | Same | Increase |
| Lincoln Life Elements | Decrease | Increase |
| Lincoln Term Accel | Decrease | Same for 3 years |
| Mass Mutual | Same | Increase |
| Nationwide | Same | Increase |
| North American | Same | Increase |
| Pacific Life | Same | Increase |
| Principal | Same | Increase |
| Protective Life | Same | Increase |
| Prudential | Same | Increase |
| Symetra | Same | Increase |
| Transamerica | Same | Increase |
| United of Omaha | Same | Increase |
What does all of this mean for you? Most people won’t keep the policy after the level term period because the price skyrockets or the benefits decrease substantially.
Instead, you’ll get a new policy if needed, or convert the policy if health issues are a factor.
How To Choose The Right Term Length
Matching your policy to your financial obligations is critical. Here’s how to decide:
- Income Replacement – Insurers 10-25 years of your annual income.
- Mortgage & Debt Coverage – Choose a term to match the duration of your mortgage.
- Young Children – Choose a duration that covers you until the kids are adults.
- Retirement Age – Select a term length that takes you into retirement.
Speaking of retirement, term is sometimes used for pension maximization strategies where you take the maximum benefit and use life insurance to replace survivor benefits.
There is no one-term-length-fits-all answer.
According to life insurance statistics, the 20-year policy is the most common, but that may or may not be your best option.
Life insurers offer many durations, from 1 to 40 years. One life insurer, AIG – Corebridge Financial, offers 16 – 30 years in one-year increments.
Bottom line – Choose your policy carefully because you won’t keep the policy after the level period.
Term Lengths Available
A wide variety of term lengths are available, but not every company has them.
- 1-Year Term
- 5-Year Term
- 10-Year Term
- 15-Year Term
- 16-30 Year Term
- 20-Year Term
- 25-Year Term
- 30-Year Term
- 35-Year Term
- 40-Year Term
Some quick highlights:
1-Year Term – Also known as Annual Renewable Term (ART). Prudential’s PruTerm One is probably the most popular one-year term. Premiums must be paid annually, you can’t have any health issues, and the premium increases annually.
5-Year Term – If you only need coverage for five years, look at a 10-year term policy as you’ll find that the pricing is similar or better for the ten-year term, and you can just cancel after 5 years if no longer needed.
10-Year Term – This is a good choice if you are taking out an SBA loan, or just have some short-term needs.
15-Year Term – Great for covering mortgages, debts, education, etc.
16-30 Year Term – Corebridge Financial is the only company that offers this option. While most companies offer 5-year increments with their term policies, Corebridge allows you to choose any term length between 16-30 years in one-year increments.
20-Year Term – This is the most common term length purchased in the industry.
25-Year Term – Tends to be overpriced as only 7-8 companies offer this term length.
30-Year Term – The second most popular term length after the 20-year option. A great choice for mortgages.
35-Year Term – Another overpriced option as only three companies offer this term length.
40-Year Term Life Insurance – Banner Life and Protective Life are the only two companies to offer a 40-year term life insurance policy. It’s very expensive compared to other term lengths, and your money may be better spent elsewhere.
40-Year Term Life Insurance Rates
While a 40-year term policy sounds like a great idea, the extra expense may not be worth it. Here’s a comparison of $500,000 of coverage, the best rate class available.
| Age/Gender | 30-Year Term | 40-Year Term | % Increase |
|---|---|---|---|
| Female (30) | $24.53 | $38.48 | 56.8% |
| Male (30) | $29.12 | $53.26 | 82.9% |
| Female (35) | $28.59 | $51.83 | 81.3% |
| Male (35) | $34.06 | $69.73 | 104.7% |
| Female (40) | $38.89 | $89.86 | 131.1% |
| Male (40) | $48.93 | $112.45 | 129.8% |
The bottom line is 40-year term needs to make sense for your situation, otherwise, it’s not worth the price.
Term Life Insurance Consumer Guides
Several companies now provide consumers with PDF guides to help review policy benefits and features:
- Corebridge Financial
- Costco
- John Hancock
- Pacific Life
- Protective Life
- Prudential
- Transamerica
Convertible Term Life Insurance
A term life insurance conversion allows you to exchange your policy for a permanent one, such as whole or universal life, without additional medical underwriting.
How Term Life Insurance Conversion Works
To convert your policy, you’ll need:
- Existing Policy Details: Policy number, date, coverage amount, and conversion period.
- Conversion Illustrations: These show premium, death benefit, and policy customization options.
- Application Submission: Once you choose, sign and submit the necessary forms.
When to Consider Conversion
- If you’ve developed health issues that might complicate new coverage.
- For lifetime coverage or estate planning.
- When using the policy for life settlements or business purposes.
Pros of Conversion
- No medical exams or underwriting is required.
- Retains your original health rating.
- Offers lifetime coverage and potential policy flexibility.
- Partial conversions are possible, allowing customization.
Cons of Conversion
- Higher premiums due to permanent coverage and current age.
- Limited conversion options with older policies or niche plans.
Conversions are valuable for those seeking permanent coverage without new medical underwriting.
Term vs Permanent Life Insurance
When compared to permanent life insurance, the key differences lie in coverage duration, cost, and additional features.
Term Life vs. Universal Life Insurance
Universal life insurance is permanent life insurance that can potentially accumulate cash value, provide lifetime death benefit guarantees, and provide supplemental retirement cash in later years.
Term Life vs Whole Life Insurance
Whole life insurance is a permanent life insurance policy that offers lifetime protection, cash value accumulation, and dividends with some policies.
Term vs Other Types of Life Insurance
You may encounter other types of coverage and wonder how your life insurance policy compares to other options available.
Group Life vs. Term
Group life insurance is a benefit commonly provided by employers, often including a base policy of around $50,000 at no cost to you. Employees typically have the option to purchase additional coverage through the group plan, often at competitive rates.
With group life insurance, the base amount given to employees for free is great and should be accepted. Otherwise, you should buy your life insurance outside of work.
Membership Life Insurance
Some organizations offer life insurance programs to their members. The policies may offer some benefits and discounts that make the coverage attractive.
Examples include the AICPA Term Life Insurance program and the Costco life insurance offer.
Mortgage Life Insurance or Term Life
When comparing term vs. mortgage policies, the premiums for both policies remain level for the term. The difference concerns the coverage amount and how it gets paid out. Mortgage life insurance coverage decreases yearly with your mortgage, but your premium remains level, and the death benefit gets paid directly to the mortgage company if you die.
Term Life Insurance vs. ROP
If you would like to get money back from your term life, an ROP – Return of Premium policy may be a good fit. With the ROP, the life insurer refunds all premiums you pay at the end. ROP may sound like a good deal (and it can sometimes be), but remember that your ROP will be more expensive.
FAQ
Term life insurance is worth it because it provides the most coverage for the lowest price compared to universal or whole life.
Term life insurance is temporary, providing coverage for a specified duration, while whole life insurance builds cash value and can last a lifetime.
If you outlive your term life insurance, your beneficiaries receive nothing. But keep in mind two things. First, your policy is most likely convertible to permanent life insurance. Secondly, even when the term ends, most policies become annually renewable to age 95.
When your policy expires, you may have several options, including converting your policy to permanent life insurance, replacing it with a new policy, lapsing it, or selling it for a lump sum.
No, there is no cash value. However, some policies offer a return of your premium if you cancel the policy.
Group coverage is offered by your employer. Most employers have a base amount of life insurance provided to all employees and an additional amount that employees may purchase.
Yes, suicide is covered if the suicide takes place after the contestible period (typically 2 years).
Ready to secure your financial future? Get your personalized term life insurance quote today!
Final Thoughts
Term life insurance is a simple, cost-effective way to protect your family’s financial future. With its affordability, flexibility, and ease of understanding, it’s a great choice for individuals and families with temporary coverage needs.
Take the time to evaluate your obligations, and explore optional riders to enhance your policy. Whether you need a short-term safety net or a stepping stone to permanent coverage, term life offers the peace of mind you deserve.
