Term life insurance pays death benefits to beneficiaries if the insured dies during the policy period. The duration of coverage is typically 10, 15, 20, or 30 years. Term life premiums vary based on several factors, including age and health. Term life premiums start as low as $15 per month for a healthy 20-year-old.
Term Life Insurance Providers
When you’re looking for a term life insurance provider, your first concern may be competitive pricing. However, you also want to have confidence that the death benefit will be paid quickly and without hassle to your beneficiaries. There are many horror stories of subpar companies delaying claims up to six months or outright denying them.
Top Term Life Insurance Providers
People under the age of 35 who want fast policies with no medical exam
Middle-aged individuals with minor to moderate health conditions
Individuals able to afford policies that return premium at the end of the term
Young individuals looking for short policy terms with renewable options
Homeowners seeking mortgage payment protection for the loan period
Consider these top term life insurance providers:
Policygenius is the right choice for consumers who want to find term insurance without extensive medical exams. Their array of provider partners allows them to shop carriers to find the right insurance company that has immediate issue policies for individuals under 35 years old and in good health.
Policygenius is an online personal insurance broker with top-tiered life insurance providers. The online Policygenius platform allows consumers to shop for life and disability insurance in a quick, no-hassle fashion.
New York Life
New York Life is a great choice for people who may have minor chronic health conditions, such as high blood pressure or cholesterol, to find affordable term insurance. Most policies are convertible, allowing people to buy something now and turn it into permanent insurance at a later date.
New York Life is considered the top life insurance carrier in the nation when it comes to superior financial strength. The company offers life insurance through a massive network of local, independent life agents who work with consumers in the office or at the convenience of the consumer’s home.
Allstate is the smart option for individuals who don’t need permanent insurance and like the concept of getting all premiums back after a term is done. Allstate’s return of premium term insurance gives policyholders all premiums back if they outlive the policy.
Allstate is a national insurance carrier with local agents able to offer home, auto, life, and commercial insurance. Consumers are able to bundle coverage and get multiline discounts when purchasing home, auto, and life insurance through Allstate agents.
MetLife is the right choice for anyone seeking inexpensive term insurance. The company is a price leader in many categories, including for consumers who have had health issues and may otherwise be ineligible with other companies.
With 90 million customers, MetLife is one of the largest life insurance, annuity, and employee benefit providers in the world. This insurance carrier focuses on the life and health components of insurance with financial planning, making it a leader for long-term planning solutions.
Northwestern Mutual is the right choice for new home buyers who want to protect against their mortgage debt but don’t have other needs for permanent insurance. Northwestern Mutual’s declining term insurance policy lets the homeowner reduce payments as the insurance need diminishes.
Northwestern Mutual offers a wide range of personal insurance and investments, including life insurance, disability insurance, long-term care insurance, annuities, and mutual funds. This is a mutual company where policyholders participate in the profits of the company through dividends on permanent life insurance products, like whole life insurance.
What Is Term Life Insurance?
Term insurance has a specific period in which the policy is in effect. When the period ends, the policy no longer exists and the insurance company has no obligation to the insured or their beneficiaries. Term life insurance is sometimes called temporary insurance because the policy only lasts a set time.
Many insurance agents give the analogy of renting a home versus buying a home to describe term life insurance. When renting, you have use of the home during the lease but have no rights once the lease is over. Term life insurance works similarly, but this is different than whole life or variable life insurance policies that build cash value, akin to the equity a homeowner gets in their home.
What Term Life Insurance Covers
Term life insurance covers beneficiaries by paying a benefit if you die while the policy is in force. There is no restriction on how your beneficiaries can spend the money even though the purchase purpose is usually very specific, such as replacing several years of income, funding college for the kids, or paying off a home.
It is possible to name a living trust as the beneficiary to designate how beneficiaries can spend it. The living trust dictates things like whether or not the money can be used for college, buying a home, or paying for a wedding. It can also have a spendthrift clause, making sure beneficiaries don’t waste the money quickly on frivolous things like race cars and world trips instead of college.
What Term Life Insurance Doesn’t Cover
Term life insurance is similar to other types of life insurance with several exclusions and limitations. Common exclusions include death by suicide and military activities. Individual carrier exclusions often exist for high-risk lifestyles such as flying small aircraft, skydiving, scuba diving, and other dangerous activities.
Insurance providers may have a two-year exclusion period for some causes of death. This means a claim is excluded from benefits if it occurs in the first two years of the policy, but is paid as long as the threshold period has been met. Check with potential insurance carriers to see what specific exclusions are listed.
How Term Life Insurance Works
Term life insurance covers your beneficiaries’ risk of financial loss by paying the policy’s face value if you die before it expires. During this term, which is typically 10, 15, 20, or 30 years, the policy owner pays a fixed premium, usually on a monthly basis.
A term life insurance policy owner can be an individual or a business. When purchased by an individual, the policy owner and insured are usually 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, such as a valuable employee, founder, or owner.
Here are some considerations to help tailor a term life insurance:
- Convertibility: Allows the policyholder to convert part or all of the policy into whole life during designated periods in the term; conversion pricing is based on whole life rates at the age of conversion.
- Auto-renewability: Provides the option for the policy owner to renew the policy for another term and the newly obtained age renewal rates without needing another health exam (meaning a policy started age 30 is renewed at age 40 per the 40-year-old’s rate).
- Waiver of premium rider: Pays premiums if the insured becomes disabled and is unable to pay the premiums, keeping the policy in force essentially for the remainder of the insured’s life.
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 often the most affordable life insurance product. But keep in mind that regardless of which option you pick at the end of your term, your premiums will almost definitely increase.
For example, 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 receives 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 tuition.
Understanding Term Life Insurance Contracts
Term life insurance is a contract between the policy owner, their beneficiaries, and an insurance company. Notice that the person named on the policy, the insured, isn’t necessarily any of those even though his or her life determines premiums and triggers benefits. The policy owner has what is called an insurable interest on the insured’s life and is obligated to pay the premium. The life insurance company pays the designated death benefit to beneficiaries should the insured die during the policy period.
The insurable interest is simply a financial hardship should the insured die. For life insurance, a family member who relies on the insured’s income or a business partner, investor, or lender who relies on a key employee has an insurable interest. Term life insurance contracts are unilateral, meaning once the insured is underwritten and approved, the insurance company cannot cancel the policy as long as the policyholder pays the premium.
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 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, 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 and develops a cash value account, whereas term life is temporary.
Here are details on how individuals and businesses use term life insurance:
- Individuals: The most common purchaser of term life insurance is an individual who wants to provide financial support for surviving family members if he or she dies prematurely. The death benefit may be used to replace income or pay debts, such as a mortgage, college tuition, or funeral expenses.
- Businesses: Small businesses may use term life for key man insurance, which covers essential 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.
“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.”
– Raquel Murphy, Vice President of Individual Life Insurance, HUB International
Specific individuals and businesses that may need term life insurance include:
- Family breadwinner: Term life insurance is especially important for the individual who earns all or most of the income in a household because their premature death would cause financial suffering for surviving family members.
- Stay-at-home spouse: Many spouses make the choice to stay home with the children because it costs more to pay for childcare than what their income was. Without this stay-at-home spouse, a major expense must now be met.
- Homeowner: If you own a home and are still paying a mortgage, you may want to get a life insurance policy with a term through the expected payoff date of the mortgage.
- Small business: Many small businesses have employees who are essential 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 who wants to provide for your family’s financial needs after your death or a business owner who 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.
“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?”
– Daniel Grote, Latitude Financial Group, LLC
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 Costs
Term life insurance costs depend on your age and health, the death benefit desired, your lifestyle, and the carrier. As a general rule, the younger and healthier you are, the less you pay for life insurance, which can cost as little as $15 per month but may exceed $500.
Typical 10-Year Term Life Insurance Costs & Deductibles
Estimated Monthly Premium Based on Death Benefit
Quotes based on non-tobacco with standard health rating
Term Life Insurance Premium Factors
Life insurance premiums are based on the expected lifespan of an applicant, which is affected by various things such as age, medical history, and lifestyle. The insured is rated for both overall eligibility and premium costs. Ratings are broken down into excellent, standard, or substandard, with most favorable prices for excellent applicants.
Term life insurance premiums are based on many different factors, including:
- Gender: Women pay less than men because they have a longer life expectancy.
- Age: Younger people pay less than older because they are more than likely going to live for decades to come.
- Medical history: Poor medical history, such as cancer or stroke, may make someone ineligible or rated as substandard and expensive.
- Family health history: Poor family health history often leads to higher rates due to anticipated health issues.
- Occupation: High-hazard jobs increase your costs since there is a likelihood of untimely death.
- Chronic medical conditions: High cholesterol, high blood pressure, mental illness, and diabetes are a few examples of chronic conditions that increase premiums.
- Tobacco use: Smokers, tobacco chewers, and vapers tend to develop serious chronic conditions that can lead to premature death, so they often have higher rates.
- Lifestyle: High-risk lifestyles such as like rock climbing, skydiving, and flying small aircraft can increase life insurance premiums.
Term Life Insurance Features
There is more to term life insurance than just price and duration. While some policies expire without an option to extend death benefits for a new premium, many policies offer the ability to either automatically renew or to convert to permanent insurance. Understanding this terminology can help you choose the right term life policy for your needs.
The basic features of term life insurance are renewability and convertibility:
Renewable Term Life
One of the biggest challenges consumers have to get life insurance as they get older is insurability. Renewable term life eliminates the need to get another health exam and buy a new policy. Instead, policy owners can opt to renew their current policy at a rate based on their current age with either standard or existing health ratings (per the original underwriting of the policy). Most renewable term policies have a final age limit where the policy is no longer renewable based on life expectancy.
Convertible Term Life
Convertible term life allows the policyholder to convert all or part of their term policy into whole life insurance. There is usually a conversion calendar set at five- or 10-year intervals, indicating when the policyholder can convert the amount they choose into whole life while keeping the underlying term life in place. Conversion doesn’t require a new health exam but is based on the policyholder’s age at conversion and standard health or existing ratings.
Term Life Insurance Types
Term life insurance may seem pretty straightforward, but consumers often find there are various names used when talking about term life. These usually refer to the type of term insurance offered and how it can satisfy a specific insurable need.
The four primary types of term life insurance are:
1. Annual Renewable Term (ART) Life Insurance
Annual renewable term (ART) life insurance policies are one-year term contracts that are guaranteed renewable at the policyholder’s option. These policies use current age mortality tables, so premiums are less expensive early on and increase with each renewal period. While some ART policies limit the number of years they are renewable, many business owners use them for key person policies because of the flexibility and affordability.
2. Level Term Life Insurance
Level term, also called guaranteed level premium term life insurance, is the most common form of term life insurance. Terms are typically 10, 15, 20, or 30 years. Some carriers offer terms as short as five years to help consumers with limited budgets get some coverage as they build careers and income. As the name of this product suggests, both the term and the premium remain the same throughout the policy contract.
3. Return of Premium (ROP) Life Insurance
Return of premium (ROP) has a designated term like other term insurance types, but it pays all premiums back to a policyholder if the insured survives the policy. This type of term policy is more expensive than others but serves as a long-term savings program if insurance needs are expected to reduce by the end of the term.
For example, assume you have a 10-year ROP because you want to make sure your children have money for college. In 10 years, if you are still alive, you can now use the entire amount refunded to fund their college plans. Some insurance carriers refund 100% of the premiums paid while others may take a small administrative fee upon ROP redemption. ROPs are typically three to five times more expensive than other term policies but less expensive than permanent insurance.
4. Decreasing Term Life Insurance
Decreasing term life insurance is most commonly used with mortgages, thus most frequently referred to as mortgage insurance. Don’t confuse this with private mortgage insurance (PMI) required by the mortgage lender for default. Decreasing term insurance sets a term, often 15 or 30 years, and then reduces the death benefit over time as your mortgage gets paid off. The premium may either be amortized over the course of the policy term and remain level or start higher and reduce every year commensurate with the new death benefit value.
Term Life Insurance Pros & Cons
Term life insurance is usually purchased because it is the most inexpensive life insurance policy a person can get. 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.
Pros of Term Life Insurance
The pros of term life insurance center around its affordability and simplicity:
- Low cost: Term life insurance is pure insurance without cash value, investments, and other bells and whistles that could increase the costs. As a result, term life premiums can be less than one-third the cost of alternatives.
- Renewable: Many term life policies are renewable, which means you can renew the policy’s end without having to show proof of good health. Premiums typically go up with each renewal.
- 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 a set time, which means it does not provide permanent coverage.
- Increasing premiums: If you want to continue coverage after the term ends, your premium payment usually increases.
- No cash value: Term life insurance does not build cash value, which means the policy is worthless after the term ends.
- Lost insurability: Age and health issues can mean you are no longer insurable at the end of the term, regardless of how much you are willing to spend.
Many people use a combination of permanent and term insurance to maximize coverage, long-term growth, and maintain affordability. Mixing in permanent insurance allows you to make sure you always have some insurance in place even if your health declines.
Term Life Insurance Alternatives
Term insurance is known as the inexpensive life insurance choice, but it is only one of many options. When shopping for life insurance, you will be bombarded with quotes and concepts that include whole life, universal life, and variable life insurance. Understanding how different types of insurance serve different life needs helps consumers make the right decisions for their families.
Term Life vs Whole Life Insurance
Unlike term insurance, whole life insurance is permanent and remains in effect for the lifetime of the insured as long as premiums are paid. Whole life also offers a cash value savings account in the policy. This gives policyholders the ability to access cash via loans or withdrawals during the existence of the insurance policy.
Term insurance is typically for younger families who need substantial coverage for home mortgages, future child expenses, or supporting a spouse. Whole life insurance is better suited for never-ending financial needs of families, such as burial expenses, caring for a disabled or special needs dependent, or legacy and tax planning.
Term Life vs Variable Life Insurance
Similar to whole life insurance, a variable life insurance policy is a permanent policy that combines the death benefit with an investment section called subaccounts. In subaccounts, the cash value is invested into mutual funds. There are usually multiple subaccount options so that policyholders can choose the investment strategy that suits their risk tolerance.
Variable life insurance subaccounts fluctuate, ideally going up in value faster than traditional interest rates. The excess cash value gives younger policyholders the ability to get permanent life insurance for a lower rate than whole life because the cash value is used to pay premiums up or grow cash value with long-term investment strategies.
Term Life vs Universal Life Insurance
Universal life insurance is a type of permanent policy that doesn’t have level premiums. It is best described as a guaranteed annually renewable term policy based on age. Premiums start lower and increase with every policy anniversary date. The cash value and interest rate are designed to help offset the increases in premium but don’t always meet the need in low-interest markets. This forces policyholders to make up the difference or lose the policy.
The idea is to help younger consumers afford permanent policies with premiums growing as their careers develop and incomes rise. Incorporating the variable component often helps policyholders pay part of the increased premium over time. These are great policies when people understand what to expect with annual rising premiums. Unfortunately, expectations are not always appropriately set with these policies, leaving many people uninsured after years of payment.
Tips on Getting Variable Life Insurance
Buying life insurance is a major decision for anyone at any age. Take a step-by-step approach in understanding what you should be covering first and how much insurance that will require. The tips below will help guide you to not overspend while still protecting what is important to you now and in the future.
Here are some ways to help you when buying term life insurance:
Buy When You’re Young
Buying at least a small term insurance policy, particularly a guaranteed renewable or convertible one, allows you to take advantage of your health and age for better rates. With every birthday, life insurance gets more expensive and you run the risk of not qualifying for a policy due to emerging health conditions.
“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 were to pass away, life insurance can protect against the unexpected loss of your income.”
– Paul Jacobs, Certified Financial Planner (CFP), Enrolled Agent (EA) at Palisades Hudson Financial Group
Consider Your Family Health History
If you know that certain health issues are common in your family, consider looking at convertible or automatically renewable policies to protect your insurability. Common conditions such as diabetes, cancer, and even depression can affect your ability to get insurance when you are older if you are diagnosed with the condition or disease.
Set a Budget
Don’t let an insurance agent scare you into buying more insurance than you can afford. Insurance exists to alleviate stress, not create more. A great insurance adviser helps you uncover how much insurance you need to cover everything and then helps you identify what the top priorities are to work within your budget. Increase coverage as you can over time.
Term Life Insurance Frequently Asked Questions (FAQs)
Life insurance is too important to your beneficiaries to make a quick decision. Below are some of the most common questions people have regarding term life insurance.
How much term life insurance do I need?
Get enough life insurance to cover your existing debts, future income, and future wishes. When starting out, few people have the budget for all the insurance the formulas say they need. Most financial planners recommend a death benefit equal to 10 times your annual salary, meaning a $50,000 annual income needs $500,000 in life insurance.
What’s the difference between term life & 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 period, such as 10, 20, or 30 years, whereas whole life insurance is permanent insurance that continues for your entire life. Whole life insurance typically costs seven to 10 times more than term life insurance.
What does it mean to ‘buy term & 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 save by not purchasing the more expensive whole life insurance policy. This gives you more control over your investments so you can target higher growth than the conservative savings offered in whole life policies.
Is term life insurance taxable?
According to the IRS, term life insurance is not taxable because life insurance proceeds aren’t included in gross income. Therefore, you don’t have to report it when you file your taxes. However, in some rare instances, life insurance proceeds come with interest, and that interest is reported as income. Additionally, proceeds from policies that name family trusts as beneficiaries are taxed.
When should I get term life insurance?
The most appropriate time to get term life insurance is when other people depend on your financial support and your death would cause them financial hardship. For example, you might buy life insurance when you get married or start a family. Businesses may purchase a term life policy to insure the life of a key employee or a partner.
Term life insurance is designed to cover the biggest financial risks families face in the most cost-effective fashion. While many people would love to have permanent insurance that builds cash value, it is often cost-prohibitive. Term life insurance best protects beneficiaries for a specified period of time, such as 10, 15, 20, or 30 years.
With your biggest financial risks at stake, getting the right advice from a licensed professional specializing in life insurance is imperative. Policygenius is a good place to start and where you can learn your options, costs, and combinations of policies with no-obligation comparative quotes.