Term life insurance

How term life insurance actually works

Term life insurance is the simplest product in the whole insurance market. You choose an amount and a number of years. If you die inside those years while the policy is in force, the insurer pays that amount to the people you named. If you outlive the term, nothing is paid and the cover ends.

That plainness is the point. Because there is no savings component, almost every dollar of premium buys death benefit, which is why term life insurance gives you far more cover per dollar than any permanent policy at the same age.

The death benefit is generally paid to your beneficiaries free of federal income tax, and it is paid regardless of what the money is then used for — a mortgage, tuition, replacing a salary, or simply keeping a household running while it adjusts.

Choosing a term length

The right term is the number of years your household would struggle without your income. Most people do not need cover for life. They need it until a specific obligation ends.

A 20-year term covers a young family through the years children are dependent. A 15-year term often matches the remaining balance of a mortgage. A 10-year term can bridge the gap between an early retirement and the point where a pension or Social Security starts.

Buy the term you actually need rather than the longest one available. A 30-year policy taken at 55 costs a great deal more than a 10-year policy, and the last decade of it may cover a period when nobody depends on your earnings.

What term life insurance costs, and what moves the price

Four things drive the premium, in roughly this order of impact.

Age. Term life insurance prices rise steeply with age, and the increase accelerates after 50. The single largest saving available to most applicants is applying sooner rather than later.

Health. Blood pressure, cholesterol, body mass, and any history of cancer, cardiac events or diabetes all move you between rate classes. The gap between the best and standard classes can be 40% or more of the premium.

Tobacco. Nicotine use in any form typically doubles the rate. Most carriers will re-rate you after a documented period without it, which is worth asking about rather than assuming.

Amount and term. These scale predictably. Doubling the death benefit roughly doubles the premium; adding years adds more than people expect.

What does not move the price is which agent sells it to you. Term life insurance rates are filed with each state’s insurance department, so an identical policy from the same carrier costs the same wherever you buy it.

Level term, decreasing term and return of premium

Level term is the standard: the premium and the death benefit both stay flat for the whole term. This is what most people mean by term life insurance and what we quote unless there is a reason not to.

Decreasing term reduces the death benefit over time, usually to track a mortgage balance. It is cheaper, but the saving is often smaller than expected and the flexibility is worse.

Return of premium policies refund your payments if you outlive the term. They cost substantially more, and the refund is not adjusted for inflation, so what comes back is worth less than what went in. They suit a narrow set of circumstances.

Conversion: the option most people forget to ask about

Many term life insurance policies include a conversion privilege, letting you exchange some or all of the cover for a permanent policy without answering new health questions.

That option is worth real money if your health changes. Someone diagnosed with a serious condition at 58 may be uninsurable on the open market but can still convert an existing term policy.

Conversion rights vary sharply between carriers: some allow it for the full term, others only for the first ten years or up to a certain age; some allow conversion into any permanent product, others into one designated policy. Ask for the specific terms in writing before you buy, not afterwards.

Term life insurance as you approach Medicare age

Most of the people we work with are at or near 65, and the questions change at that point.

If you still have a mortgage, a dependent spouse, or a business obligation, term life insurance may still be the right instrument, and short terms are readily available into the seventies with some carriers.

If your goal has narrowed to covering a funeral and final bills, term is usually the wrong tool. A final expense policy is designed for that, does not expire, and asks far fewer health questions.

And if a term policy you bought years ago is about to end, look at conversion before it lapses. Once the term expires the option goes with it.

Common mistakes with term life insurance

Relying only on employer cover. Group life typically ends when the job does, and it is rarely portable on good terms. It is a supplement, not a plan.

Naming an estate as beneficiary. Naming people directly keeps the payout out of probate. Naming your estate can delay it by months.

Never revisiting the beneficiary form. Divorce, remarriage and deaths in the family all change who should be listed, and the form governs — not your will.

Buying the amount that fits the budget rather than the need. Work out the need first. If it is unaffordable, shorten the term before you cut the death benefit.

How the application and underwriting actually run

There are three routes to a term life insurance policy, and which one you take affects both the price and how long it takes.

Fully underwritten. A paramedical exam, blood and urine samples, and a review of your prescription and motor-vehicle records. It takes three to six weeks and produces the lowest rates for people in good health.

Accelerated underwriting. No exam for applicants who fit the carrier’s profile on age, amount and answers. Decisions can come in days. Rates are close to fully underwritten, sometimes identical.

Simplified issue. Health questions only, no exam and no records pulled. Fastest and most forgiving, but the death benefit is capped lower and the rate is higher.

Answer every question accurately. Term life insurance contracts carry a contestability period, normally the first two years, during which the insurer can review the application if a claim arises. A misstatement found then can reduce or void the benefit at the worst possible moment.

Questions we are asked most

Can I have more than one policy? Yes, and layering is often cheaper than one large policy — for example a 30-year policy for income replacement alongside a 15-year one that ends when the mortgage does.

What happens if I miss a payment? Policies carry a grace period, usually 30 or 31 days. After that the cover lapses, and reinstating it may require new health questions.

Does term life insurance pay for suicide? Most contracts exclude it during the first two years and pay normally afterwards. The exact wording is in the policy.

Will my premium ever change? Not during a level term, provided you pay on time. At the end of the term, most policies renew annually at a sharply higher rate, which is the point at which most people let them lapse.

Check any of this independently

None of this should be taken on our word alone.

• NAIC — life insurance consumer information — from the association of state insurance regulators
• NAIC consumer tools — look up any agent’s licence and complaint history
• USA.gov — life insurance — including how to trace a lost policy

Related guides on this site

• Life insurance overview — how term, whole, universal and final expense compare
• Whole life insurance and final expense cover
• Medicare Simplified — if you are also approaching 65
• Book a no-cost appointment

Or call (877) 808-2900. We will price term life insurance against your actual age, health and obligations, and tell you if you need less of it than you think.