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What Is Term Life Insurance?

Maggie Overholt

Maggie Overholt

Senior Insurance Editor

5 min. read

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What Is Term Life Insurance?

Term life insurance covers you for a set length of time, usually between 10 and 20 years. It’s meant to add a protective cushion during life’s most demanding financial periods — like while you’re providing for children or paying off a mortgage. Term life policies will only pay out if the insured person passes away during their term. Once that initial period is up, the owner can decide to renew their policy, convert it to permanent life insurance, or stop being insured altogether.

Who Should Get Term Life Insurance?

Term life is the best life insurance option for almost everybody. It gets the job done, providing a financial safety net when you need it most, and it’s affordable enough to be accessible on most budgets. Parents and other people with dependents should see term life insurance as a high priority — though it’s important for anyone who has debts or financial obligations that might end up being shouldered by their family should they pass away.

Permanent life insurance, the alternative to term life, is much more expensive and generally only best for people who have extensive, complex financial portfolios. You can learn more about permanent life insurance here.

What Does Term Life Insurance Cover?

Term life insurance provides a one-time payout, called a “death benefit,” if the insured person passes away within their policy’s time limit. This payment is meant to cover final expenses (like funeral costs) and outstanding financial obligations the policyholder leaves behind — anything from lost wages to college funds for their kids to business loans or mortgage payments.

Since the scope of coverage needs varies so much, the range of available death benefits is wide, too. Policies can be relatively small (starting at $25,000 with a few companies) or incredibly large (in the millions, in some cases). Keep in mind that the larger a policy’s death benefit is, the more it will cost the policyholder in premiums.

How Does Term Life Insurance Work?

When you buy term life insurance, you’ll have to decide two big things:

  • How long the term should last
  • How big your policy’s death benefit will be

For most people, a term life insurance policy will last 10, 15, or 20 years — long enough to carry them through supporting dependents, paying off loans, or fulfilling other big financial obligations. The second part of the equation, finding the right death benefit, is a little more complicated.

Choosing a death benefit is highly personal. The lump sum should be enough to cover final expenses, debts, and support for dependents — but not too much, because a bigger death benefit means higher premiums. When you’re ready to buy a policy, your life insurance agent will help calculate the right coverage limit to fit your needs. If you’re having trouble settling on a company, we recommend speaking with an independent agent who works with a few different providers and can give advice without putting the hard sell on just one.

Pro tip: To compare term life prices online, you’ll have to give a death benefit amount during the quote process. We recommend starting with a ballpark estimate from an online life insurance calculator if you’re not quite ready to speak with an agent and get an official number.

How Do I Choose a Term Life Insurance Company?

There are five essential qualities to look for when choosing a term life insurance company. You can learn about each factor in detail here, though we’ve summed up the list below to help you get started. Term life insurance shoppers should choose a company with:

  • Strong financial ratings
  • A positive customer service record
  • Flexible options for coverage and term lengths
  • Options to renew your policy or convert to permanent insurance when the term is up
  • Affordable rates for your unique situation

We’ve done a lot of that work for you and highlighted some standout choices in our review of the best term life insurance companies. If you want to start on a wider playing field, you can also check out our ratings for the top 20 life insurance companies in the U.S., where we compile financial scores and customer service rankings all in one place.

How Much Does Term Life Insurance Cost?

Like all things life insurance, premium costs for term life are highly dependent on who you are. Consider a policy worth $250,000 to $500,000. A young (read: 20s to mid-30s), healthy person will likely pay between $10 and $30 per month for this coverage. Someone slightly older (think 40s to 50s) will probably pay closer to $40 to $50 per month. And for a tobacco user or someone with a pre-existing health condition, premiums can be nearly twice as expensive.

Age and health are the two biggest factors that go into determining life insurance prices. Still, there are proactive steps you can take to lower your premium. See our guide to term life insurance for tips and tricks to help reduce your rates.

It’s worth noting that term life insurance rates also vary by company. Every insurer has a different underwriting process, which means they’ll weigh your personal “risk factors” a little differently and set prices accordingly. For instance, one company might have favorable prices for seniors, while another might be a little friendlier toward diabetics. That’s why it’s so important to shop around, compare rates, and look for the the best deal on the life insurance coverage you need.

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