What Is Term Life Insurance?

Learn about the different types of term life insurance available and how you can get the best coverage.
By Mike Parker
Updated Sep 8, 2022
A doctor who is referring one of his patients for Term Life Insurance.
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Term life insurance is a popular option for people looking to insure their lives for specific lengths of time.

These plans have a lot of great benefits and can also be adapted to fit changing needs as people go through life. However, it’s important to understand your options before you decide on life insurance coverage.

This guide will cover what term life insurance is, the different kinds of term life insurance available, and what you should consider before signing up for it. 

What Is Term Life Insurance?

Term life policies work similarly to other types of life insurance. They are contracts between policyholders and insurance companies that financially cover people in the event of their death.

Policyholders pay the insurance company a monthly premium and when the policyholder dies, the insurance company pays out a death benefit.

The difference is that term life insurance plans only offer coverage for a fixed period. The word “term” simply means a period or length of time.

If you decide to get term life insurance, your coverage will last for a set number of years stated in the contract. 

Once a coverage period ends, the contract will end with the insurance company and you will have to get a new life insurance policy. 

Coverage periods can vary and depend on your insurer. You might be able to get a term life plan for any length of time that you choose.  

Here are some of the typical lengths of coverage that people can purchase with a term life insurance plan:

Standard Periods for Term Life Insurance Coverage
30 years
20 years
15 years
10 years
Year by year

An insurance agent talking to her clients about Term Life Insurance.

Source: Pexels

Do I Need Term Life Insurance?

Depending on why you’re interested in getting life insurance, term life cover may be the right option for you. 

One of the benefits of term life cover is that you can get different types of plans depending on your financial situation and health status.

Here are some essential questions you should ask yourself if you’re considering buying term life insurance or permanent life insurance:

1) Why do I want to purchase life insurance?

If you are thinking about your family and ensuring their financial security, or you would like a considerable expense or cost (such as a mortgage) to be covered when you die, life insurance is a good option.

You can also purchase term and permanent life insurance. 

It’s possible to purchase one or more life insurance contracts from different insurance companies if you want extra coverage.

For example, a person with a permanent life plan can get additional coverage by buying term life insurance. Or someone with permanent life coverage can buy another permanent life plan if they want.

If you’re considering adding additional term or permanent life insurance, speak to a life insurance agent at PolicyScout to find out what coverage you can get.

2) What am I willing to spend each month on life insurance?

You should also consider what your life insurance will cost you. A term life insurance policy is usually more affordable than a permanent life insurance plan. This means you might end up paying less each month for coverage. 

3) What is your health status, age, and medical history?

Your risk profile increases if you are older, in poor health, or have a family history of disease. This means that you’ll pay more for insurance policies. Depending on your policy, you might have to go through underwriting or a medical exam more than once in your life. 

Consider all of these factors before choosing a life insurance plan.

What Is Underwriting?

Insurance companies conduct a risk assessment known as underwriting, which helps them figure out the chances of a policyholder dying prematurely.

Life insurance providers take this process very seriously and conduct an in-depth review of an applicant’s medical history, credit history, and even driving record.

If an applicant is untruthful about a medical condition or health issue, an insurer can cancel a policy and will not pay a death benefit.

4) How much life insurance coverage do you need?

While term life insurance is usually more affordable than permanent coverage, if you over-insure you might end up paying more money than you need to.

The best way of getting the right amount of coverage for your property and possessions is to assess your financial situation and figure out what kind of death benefit your beneficiaries will need.

If you want in-depth assistance in finding the right amount of coverage you should take out, speak to one of our consultants, who will be able to tell you what kind of coverage you’ll need for specific expenses.

The Different Types of Term Life Insurance

“Term life” is a general name for different kinds of life insurance. However, there are various term life plans that you can choose from. Let’s go over some of the most common term life plans available:

Level Term Life Insurance

Level term life insurance pays a fixed amount to beneficiaries regardless of when the policyholder dies. 

This means the death benefit will remain the same from the moment a policyholder signs the contract to the end of the contract.

One benefit of this type of term coverage is predictability. Policyholders know how much their beneficiaries will get when they pass away. 

Another benefit with level term insurance is that policyholders won’t have to go through underwriting repeatedly in their life. 

If a person is healthy when they get the policy, they won’t have to worry about retaining their coverage as long as they pay their monthly premiums.

A downside to level term coverage is that your expenses might go down as you age, but you still have to pay for a high amount of coverage. 

For example, let’s say you purchased a level term life insurance plan for $350,000 in your thirties and had a mortgage, car payments, and college fees to think about. 

By the time you turn 60, you’d probably have paid off your vehicle, house and sent your children to college. Your beneficiaries wouldn’t need $350,000 of life insurance to cover your debts anymore. 

Level Term Life Insurance Overview

  • With level term life insurance, the death benefit remains the same throughout a person’s lifetime.

  • A benefit of level term life insurance is that it offers policyholders predictability around the death benefit and costs associated with their plan.

  • In some cases, level term life insurance is a good option for people who don’t want permanent life cover higher costs.

  • A drawback of level term insurance is that policyholders will continue to pay for a fixed level of coverage over the entire period.

  • If circumstances change, this can mean they are over-insuring their life and potentially paying too much.

Decreasing Term Life Insurance

Decreasing term life insurance policies are plans that have a diminishing benefit or face value over time.

These plans usually cover a specific expense, such as a mortgage or home loan, which will decrease as policyholders pay it off.

For example, let’s say a person gets a thirty-year decreasing term life plan with a death benefit of $500,000 that decreases at 5% each year. Here’s how their coverage will look over the policy period:

Example of Decreasing Term Life Policy

Year 1$500,000.00Year 11$299,368.47Year 21$179,242.96
Year 2$475,000.00Year 12$284,400.05Year 22$170,280.81
Year 3$451,250.00Year 13$270,180.04Year 23$161,766.77
Year 4$428,687.50Year 14$256,671.04Year 24$153,678.43
Year 5$407,253.13Year 15$243,837.49Year 25$145,994.51
Year 6$386,890.47Year 16$231,645.62Year 26$138,694.79
Year 7$367,545.95Year 17$220,063.33Year 27$131,760.05
Year 8$349,168.65Year 18$209,060.17Year 28$125,172.04
Year 9$331,710.22Year 19$198,607.16Year 29$118,913.44
Year 10$315,124.70Year 20$188,676.80Year 30$112,967.77

A benefit of these plans is that they usually cost less than level term life coverage. A person with family or dependents will usually take out a decreasing term life insurance plan to make sure their property will be paid off in full if they die.

With decreasing term insurance, it’s important to remember that policy is designed to cover specific financial responsibilities in the event of the policyholder’s death.

For example, a young couple might take out a decreasing term plan to ensure their children can go to college in the event of their death. As their kids grow older they will pay for expenses like school and college through savings and investments, which means they won’t need as much coverage as their children grow up.

Decreasing Term Life Insurance Overview

  • These insurance plans have a diminishing or reducing face value.

  • These plans are usually taken out to cover a specific liability, such as a mortgage, home loan, or tuition fund.

  • Decreasing term life insurance plans are generally more affordable than other types of term life insurance.

Yearly Renewable Term Life Insurance 

Yearly renewable term life insurance is an annual term policy that gives policyholders the option to renew or sign a new policy each year.

The insurance company will offer a new policy each year at a new rate, and policyholders have the option of upgrading or changing the terms of their coverage on an annual basis.

One benefit of these yearly renewable plans is that policyholders don’t have to go through the underwriting process each time they renew their policy. 

Typically, these plans offer lower premiums than permanent coverage. However, remember that your annual premium payments will increase as you get older.

For example, if you get a yearly renewable term life plan you’ll be covered from the date of signing for 365 days. Once this term expires, your insurer will send you a new policy which you can then take out for the following year.

Yearly Renewable Term Life Insurance Overview

  • These are contracts that offer coverage on an annual basis.

  • These plans are usually more affordable than permanent life insurance policies.

  • Each year, a policyholder is given the opportunity to sign a new contract or upgrade their cover.

Return of Premium Term Life Insurance

These are term life plans that will refund the total value of premiums a policyholder has paid if they don’t die during the term of their coverage.

Adding a return of premium provision to a term life insurance policy will often cause the annual cost of coverage to increase. For example, a term life plan might cost $300 without a return of premium clause, but $500 with one. 

How does Return of Premium Term Life Insurance work?

Here’s an example of how return of premiums work with life insurance. Let’s say a 40-year-old man took out a 20-year term life plan with a return of premium provision.

If he continued to pay his premiums and lived to the age of 61, his insurance provider would pay all of the premiums back to him.

While this may sound like a good way of investing, you should always consider the higher cost of these kinds of plans. It might be that you’d be better off investing your money in a Roth IRA or other retirement vehicle.

If you have a financial advisor, speak to them before you decide. You can also reach out to one of our life insurance agents to find out what options are available.

Group Term Life Insurance

Group term life policies will cover a group of people, such as employees, professional associations, or members of a union. 

Companies usually purchase these plans and offer them as part of a benefits package. 

For example, if a person joins a trade association or company, their benefits might be group life insurance or group accidental death insurance.  

These plans work the same way as other term life plans and pay out a death benefit if a policyholder dies.

The cost of this type of coverage and share of costs will depend on the company or organization's contract with an insurer. 

Some companies cover the entire cost of term life coverage for their employees, while others pay a portion of the life insurance premiums.

In some cases, people can convert their group life coverage into personal life insurance if the contract has something known as a portable benefit. However, you will usually have to give up coverage if you leave an organization or business.

With group life cover, businesses, associations, unions, and professional groups can consolidate their costs and give their members comprehensive life coverage they wouldn’t necessarily be able to afford otherwise.

Group Term Life Insurance 

  • These are plans that offer life coverage to a group of people.

  • Companies, unions, professional associations, and other organizations offer them to employees and members.

  • Members pay a reduced rate for life coverage. These plans aren’t usually transferrable to other companies or organizations.

How Much Does Term Life Insurance Cost?

This will depend on how much coverage you would like to get, your age, health, lifestyle, term length, and the type of life insurance plan you choose.

For example, a 60-year-old male with diabetes who wants to get $400,000 life coverage for ten years will pay more than a 35-year-old female with no history of chronic illness who wants to get $250,000 life coverage.

Another important consideration when looking at the cost of term life cover is how premiums will increase over your term period.

Before you sign a contract, it’s essential that you speak with your insurance agent about your monthly premiums and how they will increase. An affordable plan now might become more expensive in the future because of its payment structure.

If you’d like to learn more about term life insurance costs and premiums, contact one of our agents on 1-888-912-2132 or send an email to help@policyscout.com.   

What Are Other Life Insurance Options I Can Look At?

There are many different kinds of life insurance products that people can buy. Depending on your needs and financial situation, you might want to consider an alternative plan to general term life cover.

Permanent Life Insurance

One option is permanent life coverage. These are plans provide lifelong coverage and do not expire as long as you pay your premiums.

While it may cost more than term life coverage, getting permanent life coverage is a good option in some situations. If you are younger and in good health, permanent life insurance can be a valuable asset to have.

These plans have a cash value component, sometimes called a living benefit, which people can borrow money against or pay their life insurance premiums. 

There are two main types of permanent life cover, including whole life insurance and universal life insurance. Read our guide to permanent life insurance if you’d like to learn more about these insurance options.

Along with whole life insurance and universal insurance, there are other permanent life policies that you can buy.

A woman viewing the different Life Insurance options with her agent.

Source: Pexels

Final Expense Insurance

Final expense insurance is an excellent option for people looking to insure their lives. These plans are low-cost and will pay out a death benefit for your beneficiaries to cover funeral expenses, property transfer costs, or estate tax.

Another type of life insurance is burial or funeral insurance, which will cover the costs of funeral services, cremations, and other related expenses.

Guaranteed Issue Life Insurance

These policies don’t have underwriting processes, but they do have a waiting period before the plan pays out a death benefit.

Guaranteed issue life insurance will not pay a death benefit if the policyholder dies within the first two or three years of taking out cover.

If a policyholder passes away during the plan’s waiting period, the insurer will pay beneficiaries the total premiums paid with interest. This is known as a return-of-premium clause.

Usually, guaranteed issue life insurance plans typically cover smaller amounts and have less strict criteria.

What Happens If I Live Longer than My Term Life Insurance Policy?

Three things might happen if you live longer than the length of time stated in your term life insurance contract.

Firstly your coverage will end, which means you won’t be able to claim a death benefit once the period is over.

Secondly, your insurer might give you the option of converting your term life plan into a permanent life plan.

Thirdly, you might have to buy a new term life contract from your insurer or another life insurance provider.

If you’re nearing the end of your term life plan, reach out to one of PolicyScout’s consultants to find out how you can get the same coverage or change to a policy with lower premiums.

A woman who is learning more about her Life Insurance options.

Source: Pexels

Where Can I Learn More about My Life Insurance Options?

If you’re interested in learning about life insurance and other forms of insurance coverage, be sure to check out our Life Insurance Hub.

We’ve got articles on permanent life insurance, reviews of life insurance providers, and our top choices for all types of life coverage.

Our team of life insurance consultants can also answer questions about coverage, costs, insurance terminology, and more.

You can also reach out to find out how much life insurance you need and get your life cover questions answered. Call us on 1-888-912-2132 or send an email to help@policyscout.com to find out more.