What Is Term Life Insurance?

Term life insurance is valid for a fixed amount of time and is usually the most affordable type of life insurance. Here’s a breakdown of how it works.

Written by Jacqui Kenyon / May 18, 2022

Quick Bites

  • Term life insurance covers you during a time period you select and pays out if you die during that period.
  • It typically has the lowest premiums of any type of life insurance.
  • People generally time their policies to expire when their need for it ends—like after you’ve paid off your mortgage or your children have all finished college.
  • Factors like age, gender, smoking status and general health will affect your monthly premium costs.

Many people have an “aha!” moment about life insurance when they have a child.

All of a sudden, there’s this tiny, vulnerable person in your care, and they depend on you in every way—including financially.

Suddenly, your paycheck has a lot more responsibilities, covering day-to-day expenses like housing, food and clothing, as well as saving for future expenses like college tuition. If you were to die tomorrow, what guarantee would your family have without your income?

Enter life insurance.

There are several different types of life insurance, including term life insurance, whole life insurance and universal life insurance. This article will focus on term life insurance, which is the most affordable option and also the best fit for most people.

Inside this article

  1. Term life insurance basics
  2. The cost of life insurance
  3. Is it right for you?

The basics of term life insurance

When you buy term life insurance, you choose a coverage period (the term), and the policy pays out if you die during that period. Once the term is up, you either have to get another policy, or go without.

Alternatively, you could pick whole life insurance and universal life insurance, which last for the rest of your life, as long as you keep paying your premium. They also include a cash value component, a kind of savings account where you can accumulate money. As a result, they are more expensive than term life insurance.

Back to term life insurance, if you do die during the term, the policy will pay out the death benefit—a tax-free lump sum—to your life insurance beneficiary.

The amount of coverage you’ll need will depend on how many dependents you have, the cost of living in your area and various other factors. While each one of us will have different needs, many experts suggest that 10 times your income is a decent rule of thumb.[1]

Typically, you’ll try to time the end of your life insurance term to when you’ll stop needing the coverage. For example, say you have a child when you’re 30 years old. You decide to purchase a 25-year term life insurance policy, because by then, your child will (hopefully) be out of college and you will have already paid off your mortgage. Standard term lengths often range from 10 to 30 years.

Life insurance isn’t just for parents. Brian So, a Certified Financial Planner and life insurance advisor at Brian So Insurance, says that anyone who has dependents of any kind relying on their income should have life insurance.

“For instance, a stay-at-home partner and financially dependent elderly parents are some scenarios where it makes sense to carry life insurance,” he says.

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How much does life insurance cost?

Term life insurance is the most affordable kind of insurance, and more so if you’re young and in good health.

According to a 2021 study from LIMRA, a nonprofit financial services trade association, the typical premium for a $250,000 policy for a healthy 30-year-old is about $160 per year.[2]

Of course, your premium is going to vary based on the specifics of your personal situation, as well as the amount of coverage you want.

“Your age, smoking status, gender and health all have a significant impact on your premiums,” So says.

Here’s a quick look at some of the risk factors insurers will look at:

Age

  • The older you are, the more likely you are to die, which drives premiums upward. It can make sense to get life insurance as early as possible since premiums on most life insurance policies are fixed from the time you purchase your policy until it expires.[3]

  • According to LIMRA, about 40% of people covered by life insurance policies wished they had purchased coverage when they were younger.[4]

Gender

  • Women tend to live longer than men, so they generally pay less for life insurance.

  • For example, a 25-year, $500,000 term policy for a 40-year-old man in Arizona who is in excellent health and doesn’t smoke will cost about $46 per month in premiums. A policy with the same stats for a woman will cost about $37 per month.[5]

Smoking status

  • Whether or not you use tobacco products is a key aspect of a life insurance health exam. Cigarette smokers tend to live about 10 fewer years than their counterparts who don’t smoke.[6]

  • A 40-year-old man in Arizona who smokes will pay $280 more per month for a 25-year, $500,000 policy than a man with the same characteristics who doesn’t.[5]

Health

  • When you take out a term life insurance policy, you’ll go through the underwriting process, which will typically include a health exam and/or questionnaire about your health and family history.[1] The health exam will record your height and weight, blood pressure, blood sugar, cholesterol and other basic info.[7]

  • The better your health stats, the cheaper your premiums will be.

Deciding whether term life insurance is right for you—and how to get it

While term life insurance is a smart choice for many, if not most, situations, there are some needs that it cannot meet.

“Because term insurance policies expire, they’re not suitable for paying final expenses, taxes, charitable giving and other estate planning purposes,” So says. “That’s where whole life or another type of permanent life insurance will be a better solution because it never expires and guarantees a payout no matter when you die.”

The next question if you do decide to buy term life insurance is: How do you choose an insurance provider?

You can start with recommendations from friends, family or a financial planner, if you have one (just make sure that they aren’t also an insurance salesperson who will get a commission if you buy a policy through them).

So recommends vetting the financials of insurance companies online before making a commitment.

“The AM Best company provides credit ratings for the insurance industry,” he says. “An excellent place to start is to screen for companies listed as A+, which means they have the financial strength to pay claims and meet their financial obligations.”

Term life insurance is a simple, often affordable way to get some peace of mind. Do your homework, though, and make sure it’s the right choice for you.

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Article Sources
  1. “How Term Life Insurance Works: The Basics,” Guardian, https://www.guardianlife.com/life-insurance/how-term-life-works.
  2. “Facts about Life 2022,” LIMRA, https://www.limra.com/siteassets/newsroom/fact-tank/fact-sheets/liam-facts-2020-final.pdf.
  3. “What Are the Different Types of Term Life Insurance Policies?” Insurance Information Institute, https://www.iii.org/article/what-are-different-types-term-life-insurance-policies.
  4. “Top Misconceptions about Life Insurance,” LIMRA, https://www.limra.com/siteassets/research/research-abstracts/2021/2021-insurance-barometer-study/2021_barometer-infographic.pdf.
  5. “Get Term Life Insurance Now,” Fabric, https://meetfabric.com/term-life-insurance-quotes-rates.
  6. “Tobacco-Related Mortality,” CDC, https://www.cdc.gov/tobacco/data_statistics/fact_sheets/health_effects/tobacco_related_mortality/index.htm.
  7. “About Life Insurance Medical Exams,” Fidelity, https://fidelitylife.com/learn-and-plan/learning-center/why-do-i-need-a-medical-exam/about-life-insurance-medical-exams.

About the Author

Jacqui Kenyon

Jacqui Kenyon

Jacqui Kenyon is a writer and editor, ghostwriter, editorial consultant and media coach based in Brooklyn, NY. Her work has appeared in Business Insider, Forbes, The Daily Beast, Rate.com, Fabric, and more.

Full bio

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