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Term life insurance

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Term life insurance is a type of life insurance that remains active for a set period of years selected by the policyholder, usually between 10 and 30 years. Individuals who want financial protection for a specific period of time – such as when their children are young – may opt for term life insurance over permanent life insurance, which provides coverage for your whole life. Since term life insurance policies eventually expire, term premiums are typically between two and three times cheaper than permanent life premiums. Is a term policy the right choice for you? Researching its advantages and limitations may help you decide.

Key takeaways
  • Term life insurance only stays in effect for a predetermined number of years, such as 10 or 30 years, unlike permanent life policies.
  • Term life insurance does not come with a cash value account.
  • Term policies are around three times cheaper than permanent life insurance, on average, because the chance of a payout on behalf of the policyholder is less likely.
  • If you want to see a return on payments towards a term life insurance policy, you may want to look into conversion riders or return-of-premium riders.

What is term life insurance?

Term life insurance is a type of policy that lasts for a predetermined period of time, rather than your entire life. When purchasing a term life policy, you’ll choose a policy term, most commonly between 10 and 30 years. If the insured passes away within that term, their beneficiaries will receive a death benefit.

If the insured does not pass away within the policy term and the coverage expires, the policy will end and the beneficiaries will not receive a death benefit when the insured passes away. However, you may be able to purchase a conversion rider ahead of the end date, which converts your policy to permanent life insurance when the term ends. Typically, if you have a conversion rider, you won’t have to complete an additional medical exam at the end of your term.

Advantages of term life insurance Disadvantages of term life insurance
Cheaper than permanent life insurance on average No cash value component or investment potential to build wealth
Conversion and return-of-premium riders can add flexibility and peace of mind Only covers a specified time period
Gives families the ability to cover significant financial liabilities that will eventually expire after a set period of time, such as mortgages and tuition Sunk cost if you outlive the policy

Advantages of term life insurance policies

When choosing life insurance, it’s important to know how term and whole life insurance policies compare. Term life insurance has a couple of key advantages that make it an attractive option for those who need a larger death benefit for a specific period of time. It is typically the cheapest type of life insurance, especially for younger people or new parents. The larger death benefit at a reasonable price can provide for children dependents if something happens to the parent(s) earlier than anticipated.

Many financial planners encourage people to buy term life insurance and invest the money saved by not purchasing more expensive permanent life insurance. For policies with level premiums, the cost will not increase with age for the policy’s life as it does with some other life insurance options.

Learn more: Compare life insurance quotes

Disadvantages of term life insurance policies

Term life insurance does have a few limitations to keep in mind. For example, term life insurance policies pay out a death benefit when the insured passes away, but these policies do not include a cash value account. Whole life insurance policies, on the other hand, typically include a cash value account that may accumulate limited interest and capped returns. Some permanent life insurance policyholders use their cash value accounts to build wealth, but that option does not exist with a term life policy.

Another potential downside to having a term life insurance policy is that it only remains in effect for a certain period of time. Because policyholders can outlive their policies, there’s a chance that the death benefit will never be paid out. In fact, a study done by Penn State University indicates that 99% of all term policies never pay out a death benefit. However, that’s because most term policyholders don’t pay their premiums and let their policies lapse, not because they outlive the policy term, according to Entrepreneur.

Learn more: Best term life insurance companies

How does term life insurance work?

When purchasing life insurance, you’ll typically be able to choose from a few policy term lengths, such as 10-, 20- and 30-year terms. To help understand how term life insurance works, imagine you purchase a 10-year term life insurance policy. During that decade, you would pay your monthly or annual premium on time. If you were to pass away within that 10-year period, your beneficiaries would receive a death benefit.

If you were still alive at the end of that 10-year period, your policy would expire and your premium payments would stop without ever being paid out to the beneficiaries. However, there are exceptions to this scenario. Many of the best life insurance companies offer specialized riders, like conversion and return-of-premium riders, that tweak the way term life insurance policies work.

Types of term life insurance

There are several different term life insurance options, and some offer more guarantees than others. Usually, the more guarantees the policy offers, the more expensive the policy is. Here is a breakdown of the major types of term life insurance policies:

  • Level term insurance: Both the premiums and the death benefit remain constant over the policy’s life with this form of term coverage. Level term insurance usually lasts for anywhere from 10 to 30 years.
  • Decreasing term insurance: This type of term insurance, usually used to cover a shrinking debt such as a mortgage, is typically less expensive because the death benefit slowly decreases over time.
  • Guaranteed renewable term insurance: This type of term coverage allows the policyholder to renew the policy at the end of the term without having to undergo a medical exam or prove insurability again. It is more expensive overall, and it is important to note that the policy premiums will still increase with each successive term. A yearly renewable term is a form of guaranteed renewable term coverage.
  • Convertible term insurance: If you purchase a conversion rider and outlive your policy term, your coverage would turn into a permanent life insurance policy. Typically, you will not have to undergo another medical exam during policy conversion. Keep in mind that your premium or death benefit amount will change based on your age at the time of conversion. For example, if you wish to continue paying around the same premium, your death benefit would decrease, whereas you’d pay more to maintain around the same death benefit.
  • Return-of-premium term insurance: Some policyholders may be worried about signing up for a term policy, outliving their term and “wasting” the premiums they paid over the course of the policy term. This specialized rider provides a partial or full refund if you outlive the policy term. However, that rider will cost you extra during the policy term.

How much does term life insurance cost?

Term life insurance premiums are calculated based on the age and health of applicants. Because of this, pricing for a term life insurance policy varies but is typically significantly cheaper for younger applicants. Age and health are the main determinants of your premium, and the insurance company you choose won’t generally affect your rates much. If you get quotes for the same coverage from multiple providers, be prepared for the quotes to be similar.

The primary reason to compare life insurance companies is based on what type of policy riders you may need, how positive the customer satisfaction may be or what the insurer’s financial strength ratings are compared to other insurers.

Learn more: Affordable life insurance companies

Will I get my money back at the end of my term?

Unless you purchase a return-of-premium term life insurance policy, you will not get any money back at the end of the term. Paying premiums without receiving a death benefit is one of the potential disadvantages of purchasing term life insurance. A return-of-premium rider would increase the cost of your term life insurance, but would allow you to recoup a portion or all of your paid premiums. If you want to receive money back in the event that you outlive your policy term, you may want to discuss this option with your life insurance agent.

Frequently asked questions

Written by
Lizzie Nealon
Insurance Writer
Lizzie Nealon is a former insurance writer for Bankrate. Her favorite part of the job is making home, auto and life insurance digestible for readers so they can prepare for the future.
Edited by
Insurance Editor
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