What Is Term Life Insurance?

Term life insurance is a life insurance policy that you purchase for a set amount of years for a set death benefit.

Term life insurance provides coverage for a specific period of time, also known as term. It guarantees the payment of a stated death benefit if the covered person dies during the specified term.

Key Takeaways

Term life provide coverage for a specific number of years, or term
The death benefit is paid out to your designated beneficiary if you die during the specified term
Term life insurance premiums are fixed for the whole term, and depend on your gender, age and health
Term life is one of the most cost-effective life insurance options

Say you bought a 30-year term life insurance policy with a death benefit of $100,000. If you were to die within that 30-year period, the payout of $100,000 would go to your beneficiary.

A beneficiary is the person you designate to receive the payout upon your death, generally a spouse, child, or close relative. That 30-year period is called the life insurance term and the $100,000 is called a death benefit.

What happens when the policy’s term expires?

Term life policies are straightforward to understand and purchase. After the term is done, they simply expire. If your term life policy is about to expire, you may purchase another term life policy or convert it to a whole life policy. If you do neither of those things, the event of your death would not be covered under your insurance.

It is important to note that, unlike whole life or universal life insurance policies, term life insurance does not gain cash value on the premiums you have paid, thus not a good option if you are looking for an investment type of benefit.

What are the pros and cons of term life insurance?

The major benefit of term insurance is its simplicity and cost-effectiveness, but that simplicity can come with negative effects, too. Since the policy does not build cash value and can expire, you do not receive the added benefit of a guaranteed death amount up to age 100. Eventually, your policy will expire, and you will have to be re-rated and could end up paying higher premiums for a whole life policy later.

Term life policies are good, low-cost options for a young family or main breadwinner who needs a high amount of coverage, to settle debts – for example a mortgage, and care for children in the event of death.

How much does term life insurance costs?

The table below shows the average monthly premiums for a 30-year term policy.

The younger you are when you contract the policy, the lower the premiums, as you will end up paying life insurance for a longer time period. Similarly, women, who tend to live longer on average, usually enjoy lower rates.

Gender, Age	Monthly premiums $500K death benefit	Monthly premiums $1,000K death benefit
Female, 23	$24	$50
Male, 23	$31	$64
Female, 33	$29	$60
Male, 33	$35	$72
Female, 43	$53	$110
Male, 43	$68	$140

* Average monthly premiums by gender and age for a 30-year term policy

If cost is a major concern, term life insurance gives long-term options for high payouts with low monthly premiums.

What is a life insurance rider?

A life insurance rider is an optional feature, like a mini-insurance policy, that you can add on to your main term policy, and offers supplemental coverage. This can be for children or spouse for smaller amounts of life insurance. These riders, however, are for smaller amounts, such as $10,000, rather than a fully-fledged term policy.

There are other commonly used riders, such as:

A term conversion rider allows the policy holder to convert his term life policy to a whole life policy upon expiry of its term.

The accelerated death benefit rider will pay out a one-time lumpsum portion of the death benefit if you are diagnosed with a terminal illness. The money can be used to pay for medical or end-of-life expenses, and any remaining amount will be given to your beneficiaries.

With the return of premium rider (ROP), you get some of the life insurance payments back if your policy term expires while you’re still alive.

How to buy term life insurance?

Buying term life insurance does not have to be a difficult process. After choosing a life insurance company, you receive a quote for your age, gender, whether or not you smoke, and death benefit amount.

Once you pay a premium down payment, you will be covered until the underwriting department either approves or denies your application. You will most likely have to go through a medical exam or medical interview, and share your records about your health history and lifestyle choices to complete this process.

Once you have been approved, you get to enjoy the peace of mind of being covered under your policy.

What if your life insurance needs change over time? It’s common that our financial obligations decrease as we age. If you’re looking for a way to gradually decrease the amount of term coverage as time passes, then you should look into a life insurance ladder strategy. A life insurance ladder refers to buying several term life insurance policies that have different expiration dates to optimize the overall cost of your life insurance.

A life insurance ladder is a more complex financial plan, so it’s important to have professional help when building a ladder and doing all the accounting.

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If you have any other questions about term life insurance, be sure to reach out to your agent.