Term life insurance pays a benefit if the insured person dies before the end of a specified term, which is typically 10, 15, 20, or 30 years. Term life insurance rates are five to 10 times lower than whole life insurance. Term life premiums vary based on several factors, such as age and length of term.
The best way to get more information specific to your life insurance needs is to contact a service like Policygenius that makes it easy to compare term life insurance rates and get quotes from multiple insurance companies. With Policygenius you can get quotes within two minutes on their website.
How Term Life Insurance Works
Term life insurance covers the risk of financial loss by paying your beneficiaries if you die during the term of the policy. During this term, which is typically 10, 15, 20, or 30 years, the owner of the policy pays a fixed premium, usually on a monthly basis. Small businesses also use term life to cover the owner or a key employee.
A term life insurance policy owner pays the premiums on the policy and can be an individual or a business. When purchased by an individual, the policy owner and insured are the same. When a business buys term life, the business is the policy owner but the insured individual is a key person in the company.
At the end of the term, if the insured does not die, the policy may be renewed for another term or converted to a permanent life insurance policy, such as whole life insurance. Term life insurance is the most affordable life insurance product. But keep in mind, regardless of what option you pick at the end of your term, your premiums will almost definitely increase.
To illustrate a need for term life insurance, let’s say a person buys a 20-year term life insurance policy with a $500,000 death benefit when their first child is born and names their non-working spouse as beneficiary. If the insured person dies during the term, the spouse would receive the $500,000 death benefit, which would help offset the income lost as a result of the death or help to pay debts, such as a mortgage or future college tuition for the child.
Who Needs Term Life Insurance
Put simply, you need term life insurance if somebody would suffer financially without you. Term life is commonly purchased by individuals who want inexpensive life insurance coverage for a specific period of time. Small businesses may also buy a term life insurance policy to protect against financial loss if a key person dies or is disabled during the term.
Since term life is primarily bought by individuals or businesses to cover a specific period of time, such as 10, 15, 20, or 30 years, the cost is much lower for term life vs whole life insurance. The reason for this is that whole life insurance is permanent, whereas term life is temporary.
Here are details on how individuals and businesses use term life insurance:
- Individuals: The most common users of term life insurance are individuals who want to provide financial support for a surviving spouse or children if they die prematurely. The death benefit may be used to replace income or pay debts, payoff a mortgage or other debt, to fund college for children, or to pay for funeral expenses.
- Businesses: Small businesses may use term life for key man insurance, which covers key employees who are important to the company’s financial success. Business partners may also purchase term life as part of a buy-sell agreement to buy a deceased partner’s share from their surviving beneficiaries.
According to Raquel Murphy, Vice President of Individual Life Insurance with HUB International Northeast:
“One of the purposes of term life insurance is for business continuation. For example, term life insurance is often used when banks require key person insurance on business owners. Term insurance is used because of its low cost, which means it doesn’t have too much impact on the company’s operating budget.”
Here are specific individuals and businesses that need term life insurance:
- Single Income Families: Term life insurance is especially important for the individual who earns all or most of the income in a family household, because their premature death would cause financial suffering for the surviving family members.
- Homeowner: If you own a home and are still paying a mortgage, a life insurance policy with a term through the expected payoff date of the mortgage is wise.
- Small Business: Many small businesses have key employees who are important for the financial success of the business. A key man insurance policy funded by a term life policy for the duration of the key person’s career can be a wise investment.
- Business Partner: A term life insurance policy is often used in a cross-purchase agreement, which enables a company’s partners or other owners to purchase the ownership interest of a partner who dies or becomes disabled.
Whether you are an individual wanting to provide for your family’s financial needs after your death or a business that needs to protect against the loss of a key person or partner, determining your need for term life insurance can be simplified by asking yourself a few questions.
Before choosing the term of your policy, ask yourself these questions, according to Daniel Grote of Latitude Financial Group, LLC:
“Will we no longer need life insurance to cover our kids’ education, pay off the mortgage or provide for a stay-at-home spouse in the event of death? Will our portfolio and assets have accumulated enough to self-insure in 20 years? For businesses, will the business still have a need to buy out a deceased partner’s share in 10-plus years?”
To get the most value out of a term life insurance policy, you need to be sure that the number of years you select for the term is sufficient to cover your beneficiaries. For a family, you’ll need to have coverage through your children’s college years or when a mortgage is paid off. For a business, you should be sure the term extends at least to the key person’s retirement.
Term Life Insurance Rates
Term life insurance rates, or the amount you pay in premium, depend on several primary factors, including your age, gender, death benefit amount, length of the term, and your health. For example, monthly premiums for a non-smoking 20-year-old may be less than $10, whereas a 50-year-old smoker may pay $100 per month for the same policy.
Term Life Insurance Quotes for Male Non-Smoker, 10-Year Term
Term Life Insurance Quotes for Female Non-Smoker, 10-Year Term
The above insurance rates demonstrate how term life insurance rates increase with age, most notably once an individual reaches age 50. Also, females generally pay lower rates than males. This is because they have lower mortality rates. It’s also important to note that longer terms, such as 20- or 30-year terms, would have higher premiums than these 10-year terms.
Where to Get Term Life Insurance Quotes
When looking for term life insurance quotes, it’s important to find a provider that specializes in life insurance. Comparing providers and getting term life insurance quotes may be the most important aspect in your search for the best policy. Also, since this type of insurance is relatively standardized, meaning the features and benefits are nearly identical for every insurer, finding the best pricing is important.
Our research produced these five insurance companies and businesses that specialize in term life insurance:
Policygenius provides a service to consumers looking for quotes from multiple insurance carriers on a range of insurance types, including life, disability, renters, auto insurance and more. Policygenius makes it easy to get term life insurance quotes and to buy coverage easily online. They also offer access to expert help if needed.
Northwestern Mutual is a large, highly rated insurance company that offers a wide range of insurance products and financial services. They have a national network of 6,400 advisors to provide personal service and advice on insurance and financial planning. Northwestern Mutual is a good choice of provider for individuals wanting a full range of financial products and services in addition to life insurance.
MassMutual is also a large, national provider offering insurance and other financial products. Their life insurance offerings include term life insurance as well as several other types to choose from, including guaranteed acceptance (no medical exam) life insurance and life insurance options for business owners. MassMutual also offers immediate term life insurance online.
Like most of our other top providers for term life insurance, State Farm is a large, national insurance carrier with local agents located all around the U.S. State Farm focuses on providing basic term life coverage while keeping costs low. Their term life insurance rates begin at $15 per month for a 10-year term and a $250,000 death benefit.
Guardian Life offers a wide range of insurance products, such as annuities, disability insurance, and dental insurance, but they specialize in life insurance products. This focus enables Guardian Life to understand and provide the kind of term life insurance most people need, including flexible payment features. For example, they offer a feature that enables the coverage to remain in effect if you are unable to afford premiums due to a disability.
Term Life Insurance Features and Types
There are just a few basic features and four types of term life insurance to know. Understanding this terminology will help you choose the best term life policy for your needs.
The basic features of term life insurance are their renewability and convertibility:
- Renewable Term Life: When a term life insurance policy is renewable, it means that the policy can be renewed for another term period without the insured having to show evidence of good health. The premium due on the renewed term is usually higher than it was on the previous term, and there is usually an age limit on renewability.
- Convertible Term Life: When a term life insurance policy has a conversion feature, it means that the policy is convertible to a permanent life insurance policy, such as whole life, during a specified period of time, known as the conversion period. If you convert during the conversion period, you won’t have to show that you are in good health.
The four primary types of term life insurance are:
1. Annual Renewable Term Life Insurance
With annual renewable term (ART) life insurance, the death benefit remains the same but premiums increase each year. Since pricing is based on the likelihood of you dying within one year, the premium cost is low. However, since most individuals wanting insurance for one-year terms are high-risk and thus not insurable, ART policies are rare.
2. Level Term Life Insurance
Level term is the most common form of term life insurance. Also called guaranteed level premium term life insurance, the amount of death benefit you purchase remains the same throughout the duration of the term, which is typically 10, 15, 20, or 30 years. The premiums you pay may also be level for the entire term, for a specified period, or increase over time.
3. Return Premium Life Insurance
This type of term life insurance provides a return of some of the premiums if the insured person outlives the term of the policy. For example, if you buy a 20-year return premium term life policy and the 20-year term has expired, the premiums paid by you will be returned, less applicable fees the insurance provider may retain. Premiums for a return premium term life plan are usually much higher than level term life.
4. Decreasing Term Life Insurance
With this type of term life insurance, the death benefit decreases gradually over the term period. The amount of the death benefit protection you purchase will decrease over the term period, while the premiums usually stay the same. Decreasing term insurance can be a good choice for people who have financial needs, such as loans, that decrease over time.
Pros & Cons of Term Life Insurance
Term life insurance is a relatively simple insurance product that has clear benefits. However, this temporary form of insurance is not ideal for everyone. Before getting term life insurance quotes, it’s a good idea to consider the pros and cons of term life. The greatest pro or advantage of term life is the low cost. The primary con or disadvantage is its non-permanent coverage.
Pros of Term Life Insurance
The pros of term life insurance center around its affordability and simplicity:
- Low Cost: Since term life insurance is pure insurance without cash value, investments, and other bells and whistles, the cost of premiums are often less than one-third the cost of alternatives like whole life insurance.
- Renewable: Many term life policies are renewable, which means you can renew the policy at the end of the term, usually at a higher premium cost, without having to show proof of good health.
- Convertible: Term life insurance policies can include a conversion provision that allows the owner of the policy to convert from term life to a permanent policy, such as whole life.
Cons of Term Life Insurance
The cons of term life insurance center around inflexibility and rising costs after the term ends:
- Limited Coverage: Term life insurance only offers coverage during the term, which means it does not provide permanent coverage.
- Increasing Premiums: If you want to continue coverage after the term ends, your premium payment will increase.
- No Cash Value: Term life insurance does not build cash value, which means the policy is worthless after the term ends.
Alternatives to Term Life Insurance
There are three types of permanent life insurance that are the main alternatives to term life, including whole life, universal life, and variable universal life insurance. To make sure term life insurance is the right policy for your needs, it’s important to understand the alternatives to term life.
The three primary alternatives to term life insurance include:
1. Whole Life Insurance
Whole life insurance is a type of permanent life insurance that remains in effect for the entire life of the insured, as long as premiums are being paid. When the insured dies, the beneficiary receives the death benefit. Whole life insurance also builds cash value. Because of the lifelong death benefit, premiums for whole life are significantly (up to 10 times) higher than term life insurance premiums.
2. Universal Life Insurance
Like whole life insurance, universal life insurance is a form of permanent life insurance that builds cash value, which comes from payments from the insured that are in excess of the premium payment. The death benefit can be level or increasing and premium payments are flexible, which can be an advantage for people with uneven income.
3. Variable Universal Life Insurance
Also called variable universal life (VUL), variable life insurance provides lifelong coverage like whole life. However, the cash value that builds in the policy can be invested in separate accounts, which are similar to mutual funds. Like universal life, premium payments are flexible, which is helpful if you need to adjust the payments higher or lower.
Term Life Insurance Frequently Asked Questions (FAQs)
Here are answers to common questions about term life insurance:
How Much Term Life Insurance Do I Need?
The amount of term life insurance you need depends on your primary reason for purchasing the policy. For example, if you need it for income replacement, most financial planners will recommend a death benefit equal to ten times your annual salary. So, if you want to replace an income of $50,000, you would need a $500,000 term life insurance policy.
You may also want to buy enough coverage to pay off a mortgage or put your children through college, should you die before these debts are paid. For example, if the total of your mortgage payoff amount, plus the average cost of a college education for your children, amounts to $300,000, buy a policy for at least this amount for a term long enough to pay the debts.
What’s the Difference Between Term Life and Whole Life Insurance?
The primary differences between term life and whole life insurance are the coverage period and the cost. Term life covers only a specified term, such as 10, 20, or 30 years, whereas whole life insurance is permanent insurance that continues for your entire life. The cost in premiums for whole life insurance is typically seven to 10 times higher than term life insurance premiums.
What Does It Mean to “Buy Term and Invest the Difference”?
When financial planners say, “Buy term and invest the difference,” they are advising you to get term life insurance and invest the money you are saving by not purchasing the more expensive whole life insurance policy. This way, your investments will grow over time and may eventually be sufficient to financially support your beneficiaries after your death, thereby removing the need for life insurance.
Is Term Life Insurance Taxable?
According to the IRS, term life insurance is not taxable. Life insurance proceeds received by a beneficiary due to the death of the insured person aren’t includable in gross income. Therefore, you don’t have to report it when you file for taxes. However, if you receive interest with life insurance proceeds, which is not common with term life, the interest is reported as income.
When Should I Get Term Life Insurance?
The most appropriate time to get term life insurance is when there are other people who depend on your financial support and your death would therefore cause them financial suffering. Individuals typically buy term life insurance when they get married or at least by the time their first child is born. Therefore, the time in life most people buy term life insurance is in their 20s.
Businesses may purchase a term life policy to insure the life of a key employee or a partner up to their expected retirement date. For example, if the insured person’s expected retirement age is 65 and they are currently 45, a 20-year term life policy would be purchased by the business to cover financial loss should the key person die prematurely.
According to Paul Jacobs, Certified Financial Planner (CFP), Enrolled Agent (EA) at Palisades Hudson Financial Group:
“Typically, life insurance is first purchased when someone new is relying on your income to support themselves. Whether it’s a spouse, a new child, or someone else in your life relying on you, unless you have sufficient assets to ensure that they’ll be protected if you immediately were to pass away, life insurance can protect against the unexpected loss of your income.”
Anyone who is a significant contributor to the financial health of a household or a small business is a strong candidate for term life insurance. Ask yourself what would happen to those left behind if you died unexpectedly. Term life insurance is the best type of insurance to protect beneficiaries for a specified period of time, such as 10, 15, 20 or 30 years.
Since term life insurance is a relatively standardized product, you are smart to shop for a quality provider that offers competitive pricing. Policygenius is a good place to shop term life insurance rates because they provide an easy way to compare quotes accurately and buy life insurance online.