Term Life Insurance Buying Guide: How to Choose
Quick Facts
Term life insurance offers coverage at fixed rate payments for a specific time period
Term life insurance guarantees payment if the insured person dies during a specific term
You can purchase a term life insurance policy that lasts anywhere from 10-40 years
If you’re here, then that means you’re considering purchasing life insurance to protect your family from financial hardship in case something happens to you. Though, if you’re new to the process, you’ll naturally have a wide variety of questions.
For example, what are the different types of life insurance? How much life insurance do you need to buy? What are some important factors to consider before buying life insurance?
Before you can answer these questions, you’ll first need to know what term life insurance is.
Below, you’ll learn everything there is to know about term life insurance so you can make the best decision for you and your loved ones.
What is term life insurance?
What does term life insurance mean? A term life insurance policy is an agreement between you and a life insurance company. You agree to make regular monthly or annual life insurance payments for a specific period of time, usually 10-30 years, and the insurance company will provide coverage during that time with a term policy.
You’ll receive a guaranteed death benefit that will be paid to your beneficiaries should you die during the policy’s term. This death benefit is typically paid in a single, tax-free lump sum amount.
There are important distinctions to be made between term life insurance vs. whole life insurance. Term life insurance is a convenient and affordable policy compared to permanent life insurance, which provides lifelong coverage.
Another aspect is that policyholders can implement an added “cash value” component to their whole life policy. This addendum can effectively build up a valuable tax-deferred asset, which is essentially money you can use during your lifetime to pay for medical bills or cover future life insurance payments.
A term life insurance policy doesn’t have a cash value component. Once the term on your policy is up, you stop making payments, and your beneficiaries won’t receive anything. You can receive your payments back if you buy a return of premium add-on, but this will raise your annual term life insurance rates.
As you can see, choosing a term life insurance policy is a monumental decision. It’s the best kind of policy if you only need short-term coverage, but it may not be a wise financial decision if you’re looking for more coverage and investment options.
Now that you know what a term life insurance policy is, we’ll discuss all the pros and cons of making this decision.
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What are the pros and cons of term life insurance?
Term life insurance isn’t for everyone. Before deciding to buy, it’s important to weigh the pros and cons first. Below is an extensive list of the pros and cons of term life insurance.
Pros of Term Life Insurance
Term life insurance is the most affordable type of life insurance because it provides the highest death benefit for the lowest monthly rates.
Term Life Insurance is Affordable
Life insurance isn’t always affordable. If you’re on a tight budget but want to make sure your family is secure after your demise, term life insurance is an ideal option. With term life insurance, you can achieve financial security for your family after death at a price you can afford.
Term Life Insurance Provides Coverage During Critical Times
If you need life insurance right away, choosing term life insurance is a great idea. Term life insurance is specifically designed for families with temporary financial needs that need immediate cash should the breadwinner pass away unexpectedly.
Term Life Insurance Provides the Highest Death Benefit Amount Per Dollar
Since term life insurance is a temporary arrangement, beneficiaries can receive an exceptionally high death benefit if the policyholder dies during the term.
Term Life Insurance is Great for Young Families
If you’re young and healthy, purchasing term life insurance may be your best option. While you’re raising your family, you can rely on its short-term coverage. When your kids get older, you can decrease your coverage or switch to a whole life insurance policy.
Cons of Term Life Insurance
Unfortunately, term life insurance is not designed as a long-term investment. It provides no cash value, and coverage terminates as soon as the policy term ends.
There is No Cash Value Component
Term life insurance policies are simple by nature. You won’t be able to draw from your policy over time. This makes whole life insurance a more attractive option for people looking for long-term, tax-deferred assets.
Coverage Isn’t Permanent
Again, your term life insurance policy will only cover you throughout its term. If you pass away after the term, your beneficiary won’t receive any payment.
Term Life Insurance is More Expensive to Renew
If you decide to renew or convert your term life insurance policy after its expiration date, you could face paying higher rates than you did before.
What are the key factors that affect term life insurance?
Term life insurance may be the most affordable option for young families, but that doesn’t mean every policyholder will get the same rate.
Here are the top factors that will influence your term life insurance quotes:
Age. Age is the primary factor that will determine your term life insurance rates. Younger people almost always pay lower premiums than other policyholders.
Gender. Gender does play a role in influencing life insurance premiums, as countless studies prove women tend to outlive men of similar circumstances.
Sum Assured. The level of coverage you agree to will determine your premium. The higher the sum, the higher your life insurance quotes.
Lifestyle. Non-smokers will usually receive discounts on their policies, while smokers pay higher rates on average.
Payouts. The type of payout you choose will affect your premium. If you opt to increase your sum over time, your rates will also increase.
Term. The longer you’re protected under your policy, the higher your premiums will be.
Overall, your age, gender, and the structure of your policy will have a definite impact on your premium.
What is the best way to choose term life insurance?
Selecting the best term life insurance policy ultimately comes down to your individual goals. For example, let’s say that you’re currently 25 years old and want to retire at 60. In this case, you should opt for a 35-year term life insurance policy.
Another person may want to retire between the ages of 65-70. What would be the best course of action for this individual?
Let’s break down each possible scenario to help you determine your life insurance term:
In your 20s. You can opt to purchase a policy with a term of 40 years or until you reach 99. Younger policyholders get the lowest term life insurance quotes possible, with the opportunity to modify coverage.
In your 30s. You can opt for a 40-year policy or until you reach 99. The structure of your policy will depend on how long you want to work, how many dependents you have, and how long your liabilities will last.
In your 40s. Again, you can opt for a 40-year policy or until you reach 99. By this time, your liabilities should decrease.
In your 50s. At this stage of your life, your liabilities are much lower than before. As a result, you should opt for a shorter term of 25 to 35 years or till age 99.
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Does term life insurance cost less?
To get a better idea of how much you’ll pay for life insurance, compare the average monthly costs for a $1,000,000 policy for a 30-year-old man and woman who don’t smoke and earn $50,000 a year.
Again, women tend to live longer than men, so they usually enjoy lower premiums. These low amounts prove that anyone can buy affordable life insurance with a substantially high death benefit payout.
What other factors impact term life insurance rates?
Age, gender, and policy structure aren’t the only major factors that can influence your premium. Other factors include your health and optional riders.
It goes without saying that life insurance companies, offering both term and whole policies, are reluctant to pay a substantial death benefit for a very sick person. Sick people are considered to be risks for insurance companies.
This means that most insurance policies are medically underwritten. You must answer several health-related questions and undergo a physical examination before you can receive a quote.
On the other hand, “guaranteed acceptance” policies won’t require you to follow any of these procedures. As a result, these policies are more expensive since insurance companies will automatically assume you have underlying health issues.
Additional policy features (also known as optional riders) can also affect the cost of your premium. Riders typically add more value, flexibility, and financial protection to a policy. Some features make a policy more expensive, while others don’t.
How much life insurance do I need?
Approaching this question can vary depending on where you are in life. Generally, the younger you are, the more coverage you’ll need to have to replace your lost income if your dependents are young as well.
In simple terms, the more your family members depend on you, the more coverage you should purchase.
A great way to determine how much term life insurance coverage you need is to multiply your current income times 30 if you’re between the ages of 18-40. Finally, as you age, you can decrease this multiple. This should give you a rough estimate of your potential coverage amount.
When determining your coverage amount, you should keep some considerations in mind, such as:
Yearly Renewable Term. This option offers coverage on a yearly renewable basis without requiring a health exam. Compared to a level premium policy, you may pay lower payments initially. However, they will increase gradually in the long term.
Return of Premium. This kind of coverage pays back all or some of your premiums if you live to the end of your term. The consequence is that your payments will increase substantially compared to a regular term policy.
Decreasing Term. This option is designed to pay off a large business loan or mortgage. Your death benefit and premium will decrease over time as you pay off the loan balance.
Guaranteed and Simplified Issued. These policies don’t require a health exam, which will result in higher premiums. Also, you can usually expect a small death benefit, which is ideal for seniors needing money to cover their funeral expenses.
Can you convert term to permanent life insurance?
If you’re considering both term and whole life insurance, there is some good news here. Many term life insurance policies have a conversion rider clause. This feature allows you to convert your policy into a whole life insurance policy without taking a medical exam.
This option provides flexibility for customers looking for permanent coverage, just in case their health suddenly starts to fail. It’s important to note that once you make this change, your premiums will get more expensive.
Nonetheless, your coverage amount is guaranteed for life as long as you keep up your regular payments. What’s more, your new whole policy will accumulate an additional cash value that can be used for policy loans.
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How to Buy Term Life Insurance
If you’ve decided to purchase term life insurance, you’re in luck.
There are three different ways you can buy the kind of coverage you’re looking for:
Through Work. Obtaining term life insurance through your employer is usually the most affordable option. However, policy options are limited if you want additional riders for your family or estate.
Financial Planner. If you can afford it, relying on a financial planner can help you buy a bespoke policy that fits your needs.
Online. The internet provides limitless options for buying term life insurance and gives you the ability to compare multiple companies at once.
Buying term life insurance online is the easiest way to get affordable coverage quickly. Use our free comparison tool below to shop for quotes from multiple companies and compare which one offers you the best term life insurance rates.
Frequently Asked Questions
Which is better, term or whole life insurance?
There is no definite answer to which option is better for you. Term life insurance is more affordable, but it’s only effective for a specific period of time. Whole life insurance covers you for your entire life, but premiums are typically expensive. Depending on your goals, either option is a viable one.
What happens if I outlive my term life insurance?
Once your term life insurance policy expires, your beneficiary won’t receive any payment. If you choose to renew, your rates may increase. For this reason, purchasing a whole life insurance policy is better if you outlive your term life insurance policy.
What is the cost of a $500,000 term life insurance policy?
The cost of a $500,000 term life insurance policy can vary depending on your age, gender, health status, and the provider you choose.
Do you get your money back at the end of term life insurance?
After your term life insurance policy expires, you won’t be able to get your money back unless you originally opted for a return of premium features. Though, this option can increase your premium substantially.
At what age should I buy life insurance?
There is no recommended age for buying life insurance. When you are young, your premiums will be lower, so it’s the best time to lock in a great deal.
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Editorial Guidelines: We are a free online resource for anyone interested in learning more about life insurance. Our goal is to be an objective, third-party resource for everything life insurance-related. We update our site regularly, and all content is reviewed by life insurance experts.
Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states.
After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health in…
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Written by
Rachael Brennan
Licensed Insurance Agent
Benjamin Carr was a licensed insurance agent in Georgia and has two years’ experience in life, health, property and casualty coverage. He has worked with State Farm and other risk management firms. He is also a strategic writer and editor with a background in branding, marketing, and quality assurance. He has been in military newsrooms — literally on the frontline of journalism.
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Reviewed by
Benji Carr
Former Licensed Life Insurance Agent
