Term Life Insurance: What It Is, Different Types, how it works



Click For More Info


What Is Term Life Insurance?

Term life insurance policy provides a death benefit that pays the beneficiaries of the policyholder throughout a specified period of time.


Click For More Info


Once the term expires, the policyholder can either renew it for another term, possibly convert the policy to permanent coverage, or allow the term life insurance policy to lapse.


How Term Life Insurance Works

When you buy a term life insurance policy provides, the insurance company determines the premium based on the policy's value (the payout amount) and  such factors as your age, gender, and health. Other considerations affecting rates include the company’s business expenses, how much it earns from its investments, and mortality rates for each age.



In some cases, a medical exams may be required. The insurance company may also inquire about your driving record, current medications, smoking status, occupation, hobbies, family history, and similar information etc.



If you die during the policy term, the insurer will pay the policy's face value to your beneficiaries. This cash benefit—which is not typically taxable—may be used by beneficiaries to settle your healthcare and funeral costs, consumer debt, mortgage debt, and other expenses.


 However, beneficiaries are not required to use the insurance proceeds to settle the deceased's debts.


If the policy expires before your death or you live beyond the policy term, there is no payout. You may be able to renew a term policy at expiration, but the premiums will be recalculated based on your age at the time of renewal.


Cost of Term Life Insurance

Term life is usually the least costly life insurance policy available because it offers a death benefit for a restricted time and doesn’t have a cash value component like permanent insurance has. For example, data from Insure-on shows that a healthy non-smoking man aged 30 could get a 30-year term life insurance policy with a $500,000 death benefit for an average of $30 per month as of February 2023. At age 50, the premium would rise to $138 a month.


Example of Term Life Insurance

Thirty-year-old George wants to protect his family in the unlikely event of his early death. He buys a 10-year, $500,000 term life insurance policy with a premium of $50 per month.



If George dies within the 10-year term, the policy will pay George’s beneficiary $500,000. If he dies after the policy has expired, his beneficiary will receive no benefit. If he remains alive and renews the policy after 10 years, the premiums will be higher than his initial policy because they will be based on his current age of 40 rather than 30.


If George is diagnosed with a terminal illness during the first policy term, he probably will not be eligible to renew the policy when it expires. Some policies do offer guaranteed re-insurability (without proof of insurability ), but such features come with a higher cost.


Types of Term Life Insurance

There are several types of term life insurance. The best option will depend on your individual circumstances. Generally, most companies offer terms ranging from 10 to 30 years, although a few offer 35- and 40-year terms.


Level Term or Level-Premium Policy

Level-premium insurance has a fixed monthly payment for the life of the policy. Most term life insurance has a level premium, and it’s the type we’ve been referring to in most of this article. As we mentioned before, this type of policy generally provides coverage for a period ranging from 10 to 30 years. The death benefit is also fixed.



Because actuaries must account for the increasing costs of insurance over the life of the policy's effectiveness, the level premium is comparatively higher than yearly renewable term life insurance.



Yearly Renewable Term (YRT) Policy

Yearly renewable term (YRT) policies are one-year policies that can be renewed each year without providing evidence of insurability.


The premiums rise from year to year as the insured person ages. Thus, the premiums can become prohibitively expensive as the policyholder ages. But they may be a good option for someone who needs temporary insurance.


Decreasing Term Policy

These policies have a death benefit that declines each year according to a predetermined schedule. The policyholder person pays a fixed, level premium for the duration of the insurance policy.



Decreasing term policies are often used in concert with a mortgage, with the policyholder matching the payout of the insurance to the declining principal of the home loan.


Benefits of Term Life Insurance

Term life insurance is attractive to young people with children. Parents can obtain substantial coverage for a low cost, and if the insured dies while the policy is in effect, the family can rely on the death benefit to replace lost income.



These policies are also well-suited for people with growing families. They can maintain coverage needed until, for example, their children reach adulthood and become self-sufficient.


The term life benefit may be equally useful to an older surviving spouse. However, premiums for people who wait until they are older to apply for insurance will pay higher premiums than if they’d gotten a level-term policy when they were younger. 


Each insurance company sets a maximum age for their term life insurance coverage. This usually ranges from about 80 to 90 years old.