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Term Life Insurance: What Everyone Needs to Know in 2024

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19 mins

As you look for the right life insurance policy for 2021, it helps to know where to start. More often than not, the best place is term life insurance.

In this easy-to-read, in-depth guide, we cover everything you need to know about term life insurance, including:

Let's get started.

What is term life insurance?

Term life insurance definition: A policy that guarantees payment of a stated death benefit if the covered person dies during a specified term.

The term of your insurance coverage begins on the date the policy is issued. Provided you pay the required premiums, the coverage will remain viable until the end of the term. If the term is 20 years, the policy will expire at the end of 20 years from the issue date.

If the term expires before your death, your coverage will terminate. You will have to decide whether to renew your life insurance.

How does term life insurance work?

A term life insurance policy is a contract with an insurance company. The policy’s owner pays the company a regular payment, called premium. In exchange, the company will provide a payment if the insured individual dies while the policy is still active.

The payment goes to the person, people, or organization named as the recipient(s) in the contract. This payment, called a death benefit, is generally tax-free to the recipients, known as beneficiaries.

People who buy term life insurance generally do so to replace income that would be lost due to an unexpected death. It helps the survivors pay bills, cover debts, and pay for funeral expenses.

Buying term life insurance usually requires you to fill out an application. Along with that application, you may have to go through a process called underwriting. This is how the insurance company assesses the potential risk you pose of dying during the term period.

Underwriting usually requires answering health-related questions and undergoing a medical exam.

Once that process is completed, the insurance company will offer you term coverage at a specified premium amount, which you can pay monthly or annually.

There are also types of term life insurance policies that do not require underwriting (see below).

What does term life insurance cover?

Term life insurance covers the life of the person — some policies allow more than one insured — who is listed as the insured on the contract. If that person dies during the specified term, the insurance company will pay the contracted death benefit to the policy’s beneficiaries.

Term life insurance policies usually have only a few limits regarding whether they will pay a death benefit. Some of those exclusions and limitations include:

  • Your beneficiaries cannot collect on the policy if you die while committing a crime.
  • The death benefit can be denied if you intentionally lie on your application about your age, health, or another key factor. However, deceptions have to be uncovered by the insurance company within the first two years of the contract, which is known as the contestability period.
  • Your beneficiaries cannot collect on a policy if they murdered you.
  • Your policy may not pay out if you commit suicide during the two-year contestability period.
  • If you have high-risk hobbies such as auto racing or scuba diving, the insurance company may place an exclusion on your policy stating that if death occurs from that activity, they are not required to pay the death benefit.

How does term life insurance payout?

If your beneficiaries are entitled to the policy’s death benefit, it is typically paid in a single lump sum. In most cases, these funds are not considered taxable income to the recipients.

Your beneficiaries may also have the option of electing to receive the death benefit in installments.

If the beneficiary receives the death benefit in installments, there may be taxes owed. That’s because the insurer will hold the principal amount in an interest-bearing account until the death benefit is fully paid out. Although the original death benefit is tax-free, the interest that accumulates is subject to income tax.

Types of term life insurance

There are several types of term life insurance. They each provide a death benefit on the life of the insured(s) for a specified term, but they may differ on cost, the value of the death benefit over time, whether there is underwriting involved, how the policy is sold and other factors.

Level term life insurance

This is the most common type of term life insurance. You pay the same level premium monthly or annually over the life of the policy. In return, the policy will pay out the contracted death benefit, which also remains level for the entire term, if you die before it expires.

Group term life insurance

Group term life insurance is often available through employers and professional associations and covers the lives of several individuals.

Group life insurance is typically cheaper because the life insurance company is collecting premium and spreading its risk among multiple people. Also, group policies are sometimes provided at no-cost to the insureds by the plan sponsor, be it an employer or association. It’s also easier to obtain because it does not require underwriting.

However, group life insurance plans also limit the amount of coverage you can apply for. Employers, for example, often limit your coverage to an amount based on your salary.

Participating in a group life insurance plan is a good way to supplement your coverage at a reasonable cost. But you should also own an individual policy to ensure that you have adequate coverage.

Joint term life insurance

Joint term life insurance is a policy that covers more than one life. The most common use of this type of policy is for married couples who have both their lives insured on the same policy.

Most policies that insure more than one life are whole life or universal life. However, this option is available on a term policy.

There are two types of joint term life insurance: first-to-die and second-to-die. First-to-die pays out to the surviving spouse after the first dies. Second-to-die, or survivorship, pays a death benefit to the heirs after both spouses are gone.

In general, joint life insurance is cheaper than purchasing two individual policies.

Direct term life insurance

Direct term life insurance can be purchased directly from an insurance company. This means you do not have to buy through an insurance agent. Direct term life insurance is usually bought online.

Proponents of this type of insurance tout the ability to get insurance faster than if you went through an agent. But at the same time, you can go through the process at your own pace without being contacted by an agent.

Return of premium term life insurance

Your term life insurance policy may come with an optional rider called a return of premium rider. With it, you can receive 100 percent of the premiums you paid into the policy if you outlive the term. It essentially provides a full refund for the policy since your beneficiaries never received a death benefit.

The rider will add to the cost of your term life insurance policy. On the other hand, a return of premium can help ensure that you don’t pay for the cost of something that never gets used.

Increasing term life insurance

An increasing term life insurance provides a death benefit that increases over the life of the policy.

The purpose of increasing term insurance is to give you extra protection over time as your expenses grow. For example, if you buy an increasing term policy while you’re single, the increasing death benefit can help if you have a family later. It’s also helpful if you buy a home after you purchase the policy, as the increasing death benefit can help your surviving beneficiaries pay off some or all of the house debt if you die.

Another common reason for an increasing death benefit is so that it grows to keep up with inflation.

The death benefit of an increasing term policy will rise increments throughout the policy term. A common example is a death benefit to increase 5 percent each year. In some cases, you can even double the policy’s death benefit over five years.

You do not have to go through underwriting or reapply for coverage during the policy term. However, your premium will go up as your death benefit increases.

[ Related read: What Are the Different Types of Life Insurance? ]

How long is term life insurance?

When you buy term life insurance, your premium payment buys coverage to insure your life for a specified term. You can purchase term life insurance in several increments. The most common terms are 10, 20 and 30 years. Some insurers offer terms in five-year increments.

The longer the term, the more you will pay in premium because the risk of death increases the longer you are covered.

When deciding which length of term life insurance to buy, you should consider the following factors.

How long you plan to keep working

The primary purpose of term life insurance is to help replace the income lost if you die unexpectedly, to provide for your family or other dependents.

Therefore, one way to determine the optimal term is looking at how long you plan to work. Once you’re no longer earning a regular income, the need for term life insurance diminishes. If you only plan to work another 20 years, there may not be a need for a 30-year term policy.

Your family situation

In most situations, people buy term life insurance to provide for the needs of their family if they pass away.

Therefore, choosing the right term period means looking at your current family situation and how long they may depend on your income.

If you have a working spouse, the need may not seem as great, but keep in mind your lifestyle and expenses are likely based on both of your incomes.

Also, if you have a newborn child, your income is likely going to be needed to raise that child for at least 20 years, if not longer. Older children may not depend on you for near as long.

How much coverage you can afford

Having some coverage is better than none. Therefore, you may opt for a 10-year term just to have some coverage. As long as you remain relatively healthy, you should be able to buy more coverage after the term expires and/or when your budget allows for a longer term.

The following descriptions are guidelines for informational purposes only. To determine the best term length, you need to consider your personal situation, conduct a needs analysis, and get quotes from multiple insurers on different term lengths. You may want to discuss your needs with a licensed independent insurance agent.

10-year term life insurance

Most people who buy term insurance opt for longer terms. However, there are situations when a shorter, 10-year term policy is appropriate.

One example is a person who is in their senior years and just had a previous term policy expire. They still have a life insurance coverage, but they don’t necessarily need coverage for 20 or 30 years. Plus, older people pay much higher rates, so a 10-year policy may be all that fits in their budget.

Another reason for a 10-year term is that you only have financial obligations for a shorter period. For example, if you’re a single parent of a teenager and you’re only concerned about making sure college tuition is paid, then you could get by with a 10-year term.

15-year term life insurance

Some life insurance companies do not offer this length of term, instead limiting their offerings to 10, 20, and 30 years.

Those that do offer 15-year term life insurance say it’s ideal for people who anticipate having financially independent children and a paid-off mortgage in 15 years.

It’s also a good option for seniors who want coverage for longer than 10 years but don’t necessarily want to shell out for a 20-year term.

20-year term life insurance

A 20-year term life insurance policy is popular with young people who need protection but may not have the budget for a longer term policy. It is often used by families with young children and/or those carrying student loan debt.

Older adults who are healthy, anticipate living longer, and who plan to continue working past retirement can also benefit from a 20-year policy.

30-year term life insurance

This is the most popular term length option. It is the longest term length most life insurance companies offer. Many people like this option because it covers them for most of their working years. It also lasts as long as a standard 30-year mortgage.

As such, 30-year term life insurance is mostly purchased by people in their 20s, 30s, and 40s. The younger you are, the less a 30-year policy will cost.

The advantage of a 30-year term policy is that it provides coverage for a lengthy period, during which the premium rate will not change (provided you buy a level term policy). A 30-year term life insurance policy will be much less expensive than a whole life or other permanent policy.

Some experts suggest always buying the longest term available to receive maximum protection. This is especially true if you’re younger and will be likely working for at least the next 30 years. This way, you’re locking in a rate based on a low age and optimal health, and will continue paying that rate as you age and the potential for health issues increases.

The flip side of that argument is that you may not necessarily need term insurance for a full 30 years. While you can always cancel a 30-year term policy after, say, 20 years, you have paid for 30-year coverage when you could have saved money by buying 20-year coverage.

40-year term life insurance

This is a fairly new type of policy in the life insurance industry. So far, only a few companies offer 40-year term life insurance.

As the longest term available, this is the most expensive term life insurance policy you can buy. In addition, because there are few companies offering it, there is not much price competition.

Posted rates for 40-year term life insurance range from $40 a month to $145 a month for females applying for $500,000 in coverage. For men, the cost ranges from $50 to $190.

In addition, the companies offering this term will not sell it to older applicants. The maximum age is around 45.

Annual renewable term

Another type of term insurance is annual renewable term (ART). This is a type of short-term policy where you have coverage for one year, with the option of renewing the policy annually.

The premiums for ART policy start out lower than comparable level term policies. But they increase over time.

What is the difference between whole life and term life insurance?

There are two main differences when comparing term vs whole life insurance. One is how long the life insurance lasts. The other is cost.

Whole life insurance is designed to provide a lifetime death benefit to the insured, hence the term “whole life.” The policy’s premium and death benefit typically remain the same for the life of the insurance contract.

Because it’s designed to provide lifelong coverage, whole life is considerably more expensive than term life insurance, which only pays a benefit if the insured passes away within the policy’s term period. The cost for a whole life insurance policy can range from four times to nine times more than a comparable term policy.

One feature whole life insurance has that is not available on term life insurance is cash value. When you buy a whole life insurance policy, the insurer establishes a premium amount to cover their costs. Any premium that the insurance company doesn’t need for its expenses becomes the policy’s cash value, which earns a set rate of interest each year.

The policy’s owner can access the cash value by withdrawing it or by surrendering the policy and taking the total accumulated cash value.

Many whole life insurance policies pay out dividends that represent a portion of the insurance company’s profits paid to policyholders.

However, many insurance advisors believe the higher cost of whole life isn’t worth the ability to accumulate cash value or earn dividends. Withdrawing money from a life insurance policy reduces its death benefit.

Also, you may not need life insurance coverage for your entire life, yet you’ll be paying the higher premium anyway.

Learn More: Term vs. Whole Life Insurance

How much does term life insurance cost?

There are many variables that affect the cost of term life insurance. However, you should be able to find a policy that fits within your budget.

The factors that affect your term life insurance cost include:

  • Your age. The older you are, the more you will pay. For example, one source showed that the average term life insurance rate by age per month is just less than $16 for people in their 20s. It increases slightly to just over $16 for those in their 30s. People in their 40s pay an average of $22 while those in their 50s pay just under $48.
  • Gender. Because men have lower life expectancies than women, they will typically pay more for coverage. In most cases this difference is minimal. For example, when comparing rates for a 35-year-old man and a 35-year-old woman, men will pay $2 to $3 more a month.
  • How much coverage you elect. The higher your face amount, the more your premium will be. For example, the average monthly premium for a 20-year term policy on a 35-year-old male is about $18 for $250,000 in coverage. It increases to just under $30 for $500,000 in coverage, $40 for $750,000 of coverage, and $50 for $1 million in coverage.
  • The length of term you elect. The average annual cost for a 10-year term is between $500 and $600. For a 20-year term, it’s between $900 and $1,000. Thirty-year term policies will typically cost between $1,500 and $1,600 per year.
  • Additional features you add. Individual term life insurance policies typically offer optional riders that provide additional coverage. These riders often require additional premium above the cost of the base policy. Common riders include an accidental death benefit that increases the death benefit for accidents, riders that offer benefits for disability, and riders that provide insurance to a spouse and/or child.
  • Underwriting factors. If you qualify for standard underwriting, you may pay around $2,000 a year for a 20-year, $500,000 term policy. If your health and other underwriting factors are better than average, you can qualify for preferred underwriting status. If so, your premium for a 20-year, $500,000 policy falls to $560 annually.

[ Related read: How Much Does Life Insurance Cost? ]

How much term life insurance do I need?

The simple answer to this question is that you need enough to meet the financial needs of your beneficiaries for a set period of time. There are a number of ways to arrive at that amount, including:

  • Multiplying your current annual salary by a factor ranging from 6 to 20.
  • Multiplying your current annual salary by the number of years left until your anticipated retirement.
  • Conduct an in-depth needs assessment in which you factor your lifestyle, age of your children, the amount of debt you currently owe, your current savings, and whether your own all or part of a business.

[ Related read: How Much Life Insurance Do I Need? ]

How to buy term life insurance

There are a number of avenues for buying term life insurance.

  • You can get an individual term life policy by working a licensed insurance agent.
  • You can buy life insurance online directly from an insurance company without working through an agent.
  • You can be covered by a group life insurance plan through an employer or association of which you’re a member.

If you’re buying an individual policy, make sure you comparison shop and get several quotes. Insurance companies have different rates and underwriting guidelines, so you may be able to save money by researching multiple options.

Jack Wolstenholm is the head of content at Breeze.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

— Published January 17, 2021
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