Takeaways
- Term life insurance is a financial product issued by insurance companies.
- Term life insurance covers the policyholder until a death benefit and pays out cash.
- Term life insurance terms range from 10–30 years, depending on coverage needs.
- Term life insurance premiums are calculated based on age, health, and lifestyle.
- Term life insurance can sometimes be converted to permanent life insurance.
What Is Term Life Insurance?
Term life insurance is a life insurance product that pays beneficiaries a death benefit over a preset term, commonly between 10 - 30 years. The main reason people get term life insurance is to provide surviving loved ones with financial assistance in the event of their death. Term life insurance can pay for surviving children’s education, pay off a mortgage, or cover general living expenses.
Unlike permanent life insurance, term life insurance does not accumulate a cash value, so you cannot borrow or withdraw from the policy. You select the coverage amount and term length with term life insurance. You can make insurance premium payments from there to keep your policy active.
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How Term Life Insurance Works
If you need to purchase term life insurance, you can start by deciding on the best term length and coverage amount for you and your family. The point of term life insurance is to provide your surviving loved ones with financial support if you pass away within the term. However, no death benefit is paid if you outlive your term and the policy expires.
You can consult your financial advisor to determine how much your family would need to cover costs – like funeral costs, paying off your mortgage, paying your student loans, funding your spouse’s retirement.
Once you decide on the right amount of coverage, the insurance company calculates your required premium. They determine this with a multi-factorial approach. Insurance companies examine your expected mortality, their forecasted interest income from investments, and the company’s operating expenses.[1] Your mortality is the risk of death and includes factors like your age, health, lifestyle (e.g., smoking), and other variables.
Depending on the insurance provider, you might also need a medical exam. Insurance companies might consider other variables, such as your current medications, driving record, accidents, or family health history, to calculate your risk.
If you pass away during your policy’s term, the policy will pay a cash benefit to your beneficiaries. The cash benefit, which is not generally non-taxable, can be used to help pay funeral costs, credit card bills, mortgages, and other expenses.[2] Importantly, you don't only have to use cash benefits on your bills. Death benefit funds can be used at the beneficiaries’ discretion.
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What Term Life Insurance Covers
The funds disbursed from a term life insurance death benefit can be used for just about anything a beneficiary might need. Your beneficiaries may use the funds to:
- Fund funeral expenses
- Pay off your mortgage
- Pay off credit cards
- Fund living expenses
- Pay for college
- Pay for a wedding
- Buy a new car
- Pay for travel
- Purchase stocks, CDs, or real estate
Many term life insurance policies will also pay out a specified benefit for final expenses – services, funerals, etc. - which reduce financial anxiety about the future.
Coverage will generally not include any market cash value or investment component, so there is no need to worry about managing investments. Your death benefit is distributed in a lump sum cash payment.
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Average Term Life Insurance Rates
Term life insurance is one of the most affordable forms of life insurance. Because there is no cash value component and only a death benefit payout, these policies are highly workable in almost any budget.
- $29.32 per month was the average cost of a 20-year, $500,000 term life insurance policy for a healthy and non-smoking 30-year-old male. (Data as of Oct 2024)
The rate table below is based on data collected from Policygenius. It reflects the average cost of a 20-year term life insurance policy for non-smoking, healthy applicants.
| 500,000 Coverage Amount | Average Monthly Cost (Male) | Average Monthly Cost (Female) |
|---|---|---|
| 20 years old | $30.28 | $22.65 |
| 30 years old | $29.32 | $22.98 |
| 40 years old | $42.94 | $35.27 |
| 50 years old | $102.50 | $78.29 |
Source: Policygenius [3]
When You Need Term Life Insurance
You will generally want an active term life insurance policy if people depend on you financially. For most people, this includes your children, spouse, or siblings who might rely on your income. Term life insurance can be a substantial safety net.
Even if you and your spouse work, managing household expenses off only one income could dramatically alter your lifestyle. Term life insurance blunts that change and alleviates any financial tension.
Here are some reasons you might consider term life insurance:
- Getting married
- Buying a house
- Having children
- Health scare
- Large debts
Most people consider term life insurance when they have a mortgage or other significant consumer debt. If you want a more affordable insurance option that focuses only on protection, consider a term life policy.
Before signing up for term life insurance, you must check your monthly budget to ensure you can comfortably afford insurance premiums.
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Term vs. Permanent Life Insurance
If you considered getting life insurance, you should know that term life insurance differs considerably from permanent life insurance. Here are the differences:
- Permanent Life Insurance policies, like whole life or universal life, cover you for your entire life as long as you stay current on payments. Permanent policies typically include a cash component that grows over time and can be borrowed against.
- Term Life Insurance, on the other hand, only provides coverage for a particular time and does not build any cash value or equity. As a younger applicant, premiums for term life insurance are lower than permanent life insurance. As you get older, premiums can rise dramatically if you need to renew your policy at an older age.
Variables Affecting Term Life Insurance Cost
Your age is one of the most significant factors affecting term life insurance premiums. Younger applicants typically pay lower premiums due to better health. Your overall health is also important, and many insurers will ask about chronic medical conditions, smoking habits, and family health backgrounds.
The term length and coverage will also affect your premiums. For example, a 30-year term life policy with a higher death benefit will cost more than a 10-year term with lower coverage.
What you do for a living might alter your premium calculation. More dangerous careers (oil rig operator vs. office accountant) will require higher premiums.
All insurance companies are different, so your quotes will fluctuate from one to another, even under the same conditions. Shop around for the best combination of plans and premiums.
Pros of Term Life Insurance
- Lower premiums are better for limited budgets. You can secure a low-cost, high-impact policy in your early twenties and thirties. All you need to do is find a premium that fits your budget. Read more about building a budget.
- Term length can be customized to suit your needs. For example, you might want your term to expire when your children reach adulthood. Alternatively, you could have sufficiently saved for retirement, and your spouse won’t need a death benefit.
- Simple Structure: Term life insurance structures are relatively easy to understand because they don't have a cash or investment component. Once they expire, there is no further financial commitment (or coverage).
Pros of Term Life Insurance
- Lack of Borrowing: Unlike a permanent life insurance policy, you cannot borrow against a term life policy. There is no cash value to borrow against. If you need access to funds, you might need to consider a 401(k) loan, personal loan, or credit card.
- Renewal Variability: While securing a term life insurance policy when you are younger can lock in low premiums, the cost of renewal can spike dramatically as you age. To renew after a term expiry might be costly.
- Timing Expiration: Most life insurance companies have an age-based cap of 80 – 90 years old. While you might need the additional coverage when you reach your older retirement years, you could be phased out of access.
Smart Summary
Term life insurance is a financial product that pays beneficiaries a lump sum cash payment in the event of a death benefit. These plans are more affordable and flexible than permanent life insurance. You can tailor your plan to meet your financial goals, expected expenses, and family plans. Term life insurance can usher in a breath of financial relief when you need it the most. Giving your family the financial security they need is a smart money move.
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(1) New York State. The Cost of Life Insurance. Last Accessed March 29, 2025.
(2) Internal Revenue Service. Life insurance & disability insurance proceeds. Last Accessed March 29, 2025.
(3) Policygenius. Average life insurance rates (October 2024). Last Accessed March 29, 2025.
