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What is term life insurance and how does it work?

Do you prefer to learn by watching? We answer this question in a video below. Click here to jump ahead.

Term life insurance is the most commonly purchased type of life insurance on the market. That means you have a lot of choices available. Fortunately, with the help of today’s article, you’ll have everything you need to decide if this type of life insurance is right for you.

Before we dive in to the specifics, let’s go over the basics first.

» Calculate: Life insurance needs calculator

Here’s What Term Life Insurance Really Means

Don’t let the name intimidate you. Term life insurance is simply a type of life insurance that lasts for a specific period of time called a term.

If the insured individual dies within that specific period of time, the life insurance carrier pays a death benefit to the insured’s beneficiaries.

Term life insurance is the least expensive way to purchase life insurance coverage.

Paying for Term Life Insurance

The majority of term policies sold are level term policies.

With level term life insurance, your policy premiums remain the same for the entire term length. So, if you’re paying $21 per month for a 30-year term policy, that $21 will never increase (or decrease) for the entire life of the policy.

Term life insurance is affordable and can be customized to fit most budgets. You have many options as to how long you want coverage for. Not everyone needs the same amount of life insurance coverage. The term length options include 10, 15, 20, 25, 30, 35, and 40 years. The longer your coverage lasts, the higher your premiums will be.

» Compare: Term life insurance quotes

Average Monthly Premiums for a Healthy 30-Year-Old Male with a $500,000 Term Life Insurance Policy
10-Year Term$16.21
15-Year Term$17.05
20-Year Term$20.70
25-Year Term$26.40
30-Year Term$34.12
35-Year Term$38.94
40-Year Term$52.18

How much term coverage you own (that’s the amount your beneficiaries would receive if you died) also affects your policy premiums. The more coverage you own, the higher your premiums.

Not everyone needs $1,000,000 in life insurance coverage. Buy what you can afford. Here at Quotacy we always say a $100,000 policy is a million times better than nothing.

Not sure how much life insurance you need? We’ve got your back.

Before you research term life insurance rates, check out our free life insurance calculator.

After answering a few easy questions, you’ll have a good estimate of how much term life insurance to buy.

Not everyone needs $1,000,000 in life insurance coverage. Buy what you can afford.

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Benefits of Term Life Insurance

  1. Term life insurance is inexpensive.
     
    The majority of Americans overestimate how much life insurance costs by three times. I challenge you to go to our term quoting tool and see how little a policy could cost you. You might be surprised.
  2. The death benefit is generally tax-free.
     
    IRA benefits will be taxed. Social Security benefits are often taxed. Your 401(k) benefits are taxed. Most pensions are taxed. But life insurance benefits? No tax – 99% of the time. There are a few situations in which life insurance payouts are taxed, but our advisors can help you avoid that situation.

     

    » Learn more: How Is Life Insurance Taxed?

  3. Life insurance is exempt from probate.
     
    If you die, many assets first go through probate (a court-supervised process) before being passed down to heirs. Probate can be costly and time-consuming. Life insurance death benefits do not go through probate (unless you name your estate or a minor child as your beneficiary–don’t do this) so your beneficiaries will receive the funds much quicker.
  4. Term can be converted to permanent for free.
     
    Most term policies automatically include a “term conversion rider” at no charge. Down the road, if you decide that you want life-long coverage, you can convert your term policy into a permanent policy without needing to go through underwriting again.

     

    Why is this beneficial you ask? Well, let’s say you purchased a 20-year term policy and were then diagnosed with stage 4 breast cancer. Normally, an invasive cancer diagnosis is a decline, but not with a conversion rider. The life insurance company cannot decline you or take your diagnosis into consideration when determining your permanent policy’s premiums.

    » Learn more: What Is a Term Conversion Rider?

  5. You can receive early benefits if diagnosed with a terminal illness.
     
    Most term policies also automatically include an accelerated death benefit rider at no charge. As an example, let’s say you have a $500,000 term life insurance policy and are diagnosed with heart failure and given nine months to live. Your specific life insurance carrier allows you to cash out up to 75% of the benefit. You decide to take out half of the benefit ($250,000) to check everything off your bucket list. When you pass away, your beneficiaries will still receive the remaining $250,000.

     

    » Learn more: Accelerated Death Benefit Rider: What It Is and Why It’s Free on Most Policies

  6. Your loved ones are financially protected.
     
    Term life insurance is best known as “income replacement.” If you have a family who relies on you and you die prematurely without life insurance, what happens to them? They struggle emotionally and financially. If you die with life insurance, your loved ones will still grieve, but they can pay the bills. They can stay in their home. They can go to college.

Get life insurance. Don’t chance that your loved ones will need to turn to family, friends, or even strangers, like with a GoFundMe account, to pay for your funeral or for their groceries. If you have people who rely on you financially, with how affordable term insurance is and how easy it can be to buy, there is no excuse not have it. Start the process by getting a free, anonymous term quote today.
 

Watch the Term Life Insurance Video

Video Transcript

Welcome to Quotacy’s Q&A Friday where we answer your life insurance questions. Quotacy is an online life insurance agency where you can get life insurance on your terms.

I’m Jeanna and I’m Natasha.

We’re getting back to the basics today.

Today’s question:
 
What is term life insurance?

 
 
Term life insurance is a type of life insurance that lasts a limited period of time, called a term. The most common term lengths are 10, 20, and 30 years. So when you buy a term life insurance policy, you will be insured for as many years as the term length you choose.

Term Length

The amount of time you are insured for. Example: If you buy a 10-year term life insurance policy, your life is then insured for 10 years.

 
 
How much you’re insured for is determined by your coverage amount. You purchase a specific amount of coverage, referred to as the face value or death benefit, which can range from $50,000 to millions of dollars depending on your needs.

Face Amount

The value of your life insurance coverage. This is the death benefit that your beneficiaries receive if you die during the policy’s term.

 
 
Term life insurance has many uses but it’s mainly designed to help protect families during their most financially vulnerable years. It replaces your paycheck if you were to die unexpectedly.

If you die during the term length of your policy, the life insurance company will send your beneficiary a check in the amount of your death benefit. Your beneficiaries can use this money however they want. They can pay outstanding debts, put money toward the mortgage, or start a college tuition fund. There are no requirements as to how they are supposed to use this money.

 

Term life insurance is the most affordable type of life insurance.

Premium

The amount of money you pay regularly to keep your life insurance policy active. Premiums are “level,” which means they stay the same for the entire term.

 
 
The amount you pay to keep the policy active is called a premium. The majority of term life insurance policies have level premiums which means the amount you pay will never increase even as you age or develop a health issue.

Exactly. So, for example, if I were to purchase a $500,000 30-year term life insurance policy that cost $35 a month, I will only pay $35 a month for the entire length of that term, which is 30 years. Unless I died during those 30 years then the insurance company will write a $500,000 check to my beneficiaries.

The cost of your life insurance policy is determined during a process called underwriting. The life insurance company reviews your application and compares your risk factors to those of an average person. If you’re more of a risk than the average then you’ll pay more. If you’re less of a risk, you pay less.

» Compare: Term life insurance quotes

And there is no penalty or fee for canceling your term life insurance policy. You simply stop paying the premiums and the policy terminates. However, just because there’s no penalty or fee, doesn’t mean you get money back if you cancel it. Term life insurance is very customizable so buy what you can afford and then you have less of a chance of canceling.

If you aren’t sure how much coverage to buy, Quotacy has an easy-to-use life insurance needs calculator. Anonymously answer three questions and the tool will estimate your needs.

Image of the Quotacy life insurance needs calculator.

You can then hit Show My Price and the tool will show you your estimated premium cost. You can adjust the term length and coverage amounts and the estimated premium will adjust accordingly. With these tools it’s easy to find a policy that will fit into your budget.

If you have questions about life insurance make sure to leave us a comment. Otherwise, tune in next week when we debunk different life insurance myths. Bye!

 
Photo credit to: Christin Hume

About the writer

Headshot of Natasha Cornelius, a life insurance writer, for Quotacy, Inc.

Natasha Cornelius

Marketing Content Manager

Natasha is a writer and content editor at Quotacy. She is also co-host of Quotacy’s YouTube series. She can't get enough of life insurance and outside of work is also working toward her Chartered Life Underwriter designation. Connect with her on LinkedIn.