Term life insurance is the easiest type of life insurance to understand. You need to choose only the amount of life insurance you want and the policy’s length.
It’s also generally the cheapest way to buy life insurance -- cheaper than whole life and universal life.
What is a term life insurance policy?
Term life insurance is a contract that says the life insurance company will pay your beneficiaries a specific amount of money if you die within a defined time frame.
You choose the death benefit (meaning payout) when you buy the policy; this is also called the “face amount.” And you name the beneficiaries who will get the money. You can change your beneficiaries any time. People who aren’t named as beneficiaries cannot get the money from the life insurer.
Is term insurance a good idea?
Term life insurance is a good idea for anyone who needs life insurance to cover a specific obligation or need, such as the years until a mortgage is paid off or until your children have graduated from college.
How much term life can I buy?
Policy amounts can be many millions of dollars. However, if you’re seeking a huge policy amount that doesn’t seem to match your actual life insurance need, the insurer will likely question you about it and might not offer a very high amount.
How long is a term life policy?
Typical policy lengths are 5, 10, 15, 20 or 30 years. There's even a policy length of 35 or 40 years from Banner Life Insurance.
There's also “annual renewable” term life. This is a one-year policy that you can renew year after year.
What happens if I outlive my term insurance?
If you outlive your term insurance, there is no refund unless you bought a special type of policy called return of premium (ROP) term life. ROP policies are more expensive than standard term life.
Can you cash in on a term life policy?
You can’t cash in a term life policy because it has no “cash value.” The only way term life pays out is if the insured person dies, or the insured person uses a policy’s accelerated death benefits in the event of a terminal illness.
If you want life insurance that has cash value, consider whole life insurance or certain types of universal life insurance.
Which is better, term or whole life insurance?
It’s not possible to say whether term or whole life is better because they are for different purposes. Term life is good for people who want to cover a specific debt or period of time. Whole life is good for someone whose beneficiaries need a financial safety net for the foreseeable future. See more about term vs. whole life insurance.
What kind of deaths are not covered by term life insurance?
Term life usually doesn’t cover death by suicide within the first couple years of the policy. Check your policy for its rules about life insurance and suicide.
Term life insurance does cover all types of deaths by accident, illness and simply old age. It covers deaths by accidental drug overdoses and murder (but will not pay out to the murderer if they are the beneficiary, so there’s no reason to kill your spouse for the life insurance money, regardless of what is implied by TV murder mysteries).
How are term life insurance prices determined?
Term life pricing is generally based on:
- Age.
- Sex.
- Height and weight.
- Current health conditions, such as high blood pressure.
- Certain health conditions of your parents and siblings, such as cancer and heart disease
- Dangerous hobbies, such as sky diving.
- Other factors correlated to life expectancy (called mortality by life insurers), including your motor vehicle record (mainly for DUI convictions and speeding tickets), credit and recent bankruptcies
At what age does term life insurance go up?
The cheapest age for term life insurance can vary by company and also by the amount and length of the policy. Generally, life insurance rates go up every year you get older. That’s why it’s good to buy life insurance as soon as you have a need for it.
What if I pay the bill late?
Term life policies generally have a grace period for payment, such as 31 days. During this grace period your coverage will stay in force. But after the grace period the policy will terminate and have no value.
What are the types of term life insurance available?
- “Level term” is the most common type of term life insurance. It’s called “level” because the premiums remain the same, or level, during the term of the policy.
- “Annual renewable term” is a policy that can be renewed every year, and rates increase each time. It's best for people who need to fill a temporary life insurance gap.
- “Return of premium term” refunds all the premiums you’ve paid if you live past the policy’s term. You'll pay at least 30% more for this feature, according to Trusted Choice, a trade group for agents. Not many of these policies are sold.
- “Decreasing term life” is a policy that gradually decreases the death benefit over the term of the policy.
- “Joint term life” is a policy that insures two lives at once, such as a husband and wife. Depending on financial needs, it can pay out when the first spouse dies or the second.
Can I decrease my term life insurance?
You may be able to decrease your term life insurance amount, generally after three years of having the policy. This can vary by company, so check your policy for “face amount decrease” rules.
For example, a John Hancock Life insurance policy we examined allowed someone to decrease the face amount in policy years 4 through 6 to 50% or less of the original face amount, as long as it did not fall below a minimum named in the policy. In policy years 7 and after, a person could decrease it to any amount above the minimum.
How to buy term life insurance
- Decide how much life insurance you need. This number is generally the total amount of the financial obligations that you want life insurance to cover, such as a mortgage amount, college tuition and/or your family's living expenses for a certain amount of time.
- Choose how long you want the policy to last, such as 5, 10, 15, 20 or 30 years. Make sure the term length covers your longest financial obligation. For example, if you have 18 years left on a mortgage, choose 20-year term life.
- Compare life insurance quotes from at least a few companies. Quotes are free and easy to get after answering questions about yourself and your health.
- Check the companies' financial strength ratings from A.M. Best or Standard & Poor's. These ratings indicate the ability of the insurer to pay claims, and you want a financially strong company. Most insurers put their ratings on their websites, or ask your insurance agent.
- Best's financial strength ratings guide
- S&P insurer financial strength definitions
5. Start an application when you have a good quote and company you like. You might be asked to take a life insurance medical exam, which you can do at home. The life insurer pays for the medical exam. Note that it can take a month or more for a life insurance application to be processed and issued.
Some companies offer "accelerated underwriting," which shortens this time, especially if you're young and healthy. If you're impatient to get a policy, ask your insurance agent if you qualify for any accelerated underwriting policies.
Questions to ask about a term life policy before you buy it
Does it have an accelerated death benefit? An accelerated death benefit rider lets you access part of the death benefit if you become terminally ill. It's often already included or available for a small cost.
Is the policy convertible to whole life? A convertible life insurance policy lets you convert term life to permanent life without showing that you're in good health. You generally have to make the conversion within a specified number of years after buying the policy. While you may not plan to convert the policy to whole life when you buy it, it’s good to know if you have the option in the future.