
Term Life Insurance Explained: What It Is and How It Works
One of the most affordable and accessible types of life insurance is Term Life Insurance. The term refers to a specific time for which coverage is provided. It is a very feasible option for people who are looking for financial protection without paying a high premium. If you are looking into insurance policies, let’s look at term insurance and how it works.
What Is Term Life Insurance?
Term life insurance offers coverage for a specific amount of time, such as 10, 20, or 30 years. As a policyholder, you also get a death benefit, so if you pass away, the amount is paid out to the beneficiaries you have designated. The difference between term life insurance and other insurance policies is that term life offers insurance for a ‘term’ and not for the whole life. Once that term is expired, your coverage also expires. So, you can then renew the policy or even convert it into a different type of insurance if you want.
This makes term life insurance very simple and straightforward. In comparison, other whole life insurances tie you for life and accumulate cash value over time. That is because the main goal of term life insurance is to protect you and your loved ones in the event of your passing.
Why People Choose Term Life Insurance?
There are plenty of advantages to choosing term life insurance. It is affordable and pretty easy to understand and follow. The premium amount for term-life policies is also lower than that for whole-life policies. That is because the term life focuses specifically on providing a death benefit. It is relatively inexpensive because no features like investment or cash accumulation exist. That is why it is also very suitable for younger people or families on a budget.
In fact, according to a 2023 survey by LIMRA, a reputed life insurance research organization, more than 50% of life insurance policies sold in the U.S. are term life insurance policies. People chose them because term life insurance is affordable, adjustable, and inadvertently gives peace of mind.
How Does Term Life Insurance Work?
The first step to knowing what policy is right for you is understanding it. Our policy experts have made this process easy to understand so that you can decide whether or not it is right for you.
Choosing the Term Length
The first step is to decide what term to select. Common terms are 10, 20, or 30 years. Whatever terms the policyholder selects, the policy remains active for that number of years. For example, if you choose ten years, your policy will simply expire and be ready to cash out after ten years.
Setting the Coverage Amount
The coverage amount is usually set so that it is enough to cover your major expenses like a mortgage, any loans, and your children’s education expenses. It also should ideally replace your monthly income. The death benefit is the money that will be paid to the beneficiaries you have assigned. It is given if you, by any chance, pass away before your policy term expires.
Paying Premiums
Once you have decided on your term and coverage amount, you will be paying a fixed premium throughout that term. The premium amount is based on many factors, i.e., age, health status, and coverage amount. For example, a healthy 35-year-old male might pay approximately $30-$40 per month for a 20-year, $500,000 policy.
Death Benefit
Life is very unpredictable, and you can never tell how long you will live. So, death benefit is a very smart feature of term life insurance. Unfortunately, if you, as a policyholder, pass away during the term, the insurance company will pay it to your chosen beneficiaries. This is usually a good amount and can cover expenses such as funerals, burials, and any outstanding debts. It can also help your family with their daily expenses.
End of Term
At the end of the term, if you outlive the policy, the policy expires. There is no death benefit to be paid. The premiums are also only returned if there is a condition for the return of premium in the policy contract. However, adding this condition often raises the cost.
Why Choose Term Life Insurance?
Insurance overall is a smart financial decision. It acts like your own personal savings account. A recent survey in 2024 showed that about two-thirds of the population lives paycheck to paycheck in America. It always pays you or your family back when you allocate a set amount of money according to your means aside from an insurance policy.
Affordability
The first and most appealing benefit of term life insurance is its feasibility. It is a lot more cheaper than whole life insurance. For example, a 30-year-old healthy and nonsmoker male might only have to pay $25 monthly for a $250,000 term life policy that is for 20 years. In comparison, a whole life policy with the same coverage could cost you 4-5 times more.
Simple Terms
A term life insurance policy doesn’t have conditions like an investment component or cash value accumulation. Your premium is fixed, and your beneficiaries have a death benefit if you pass away within the term limits.
Flexibility
You can adjust the term’s length based on your life circumstances. For example, some people choose it until all their kids are out of college. Some prefer it based on your last mortgage payment, while others can choose a shorter term. You can select ten years if you are unsure whether you can pay for longer than that.
Ease of Mind
The main reason people choose life insurance is to have peace of mind about their finances. Term life insurance also gives you financial security for your family. It also ensures that your family would not face any monetary hardship in case of your untimely death.
Types of Term Life Insurance
Now, let’s look at the different types of term life insurance that you can choose from.
Level Term
The most common type is level term life insurance. In this type, the premium and the death benefit remain ‘level,’ i.e., the same during the policy term. That makes it very uncomplicated and straightforward.
Decreasing Term
As the name suggests, this policy's death benefit decreases over time. It also decreases in combination with a mortgage or a loan. The premium amount remains unchanged, but the payout decreases as the policy matures.
Convertible Term
Convertible term policy allows you to change the same policy into a permanent one. So, you can convert it into the whole life term insurance at the end of your term. It doesn’t need you to go through any medical exams. This policy type is especially beneficial if your health declines or you simply change your mind.
Renewable Term
Renewable term offers you the option of renewing your term life policy once your term ends. The catch here is that you might have to pay a higher premium due to advancing age.
Return of Premium
In this type, you are offered the paid return of premiums if you outlive the term period. However, it does come with a higher cost. For example, as a 30-year-old male, you might pay $45-$60 per month for $500,000 in a 20-year term life policy with a return of premium feature. Usually, you could be paying less than $45-$60 if you don’t choose the return of premium feature.
Term Life vs. Whole Life Insurance
Term life insurance offers you coverage for a set term that you decide before signing the policy. In comparison, whole life insurance provides you coverage for your natural living period, i.e., for as long as you live. In term life insurance, if you happen to outlive the term, and don’t renew or convert the policy, no death benefits can be paid.
Whole life insurance has a cash value component that grows over time. You can withdraw this amount or even borrow a loan against this cash value. Term life insurance is as simple as it gets, very inexpensive, and good for people with temporary active responsibilities like mortgages or student loans. However, whole life insurance is a lot more expensive than term life insurance.
Therefore, term life insurance is ideal for most families, especially younger families raising children or wanting to cover temporary loans. For most people, term life insurance is sufficient. On the other hand, whole life insurance is a lifelong commitment. It is perfect for people who can invest and want lifelong protection and built-in savings, even though it is more expensive.
How to Choose the Right Term Life Policy
In Selecting Coverage and Term
When you are deciding what exact insurance policy to choose, you need to take into account your financial needs and long-term goals. The rule of thumb that many experts recommend is having a death benefit that is up to 12 times your income per annum. For example, if you earn around $50,000 a year, your total coverage amount in your policy should be between $500,000 to $600,000.
Apart from death benefits, you should calculate how much life insurance coverage you need. It should be based on your active loans, near-future expenses, and replacement income. The point behind choosing such a large amount as a death benefit is that it can cover your family’s total costs for over a few years after your passing.
According to LIMRA, 60% of Americans have some sort of life insurance, but 40% don’t choose the right one. They usually end up with money that is not enough to cover their needs. That is why choosing the right coverage is extremely important.
You should then select a term according to your financial needs and obligations. For example, if you have a thirty-year mortgage on your home, you should ideally choose a policy with a 30-year term. If you have young kids and want to support them through college, you might only need a 20-year term.
In Comparing Premiums
Another important step is comparing different premiums. You should always get quotes from multiple insurance providers. Remember that premiums can be based on age, income, lifestyle, and term period. For example, if you are 35, a non-smoker, and live in Texas, you might quote $25-$30 per month for a 20-year term with $250,000 in coverage. However, a male with the same health might pay $10 more on average monthly for the same coverage and term.
In Adding Riders
Another good option is to add riders. A rider, in simple terms, is a provision that can add benefits to a basic plan. For example, a return of a premium rider or accidental death of a rider. Remember that these options increase your premium by 30-50% but offer additional monetary protection. In return for premium riders, you get paid the premium amount when your term ends and if you outlive your policy term.
Why Term Life Insurance Is Important
According to the Insurance Information Institute, only half of the US population has life insurance, and many need more coverage. Additionally, the survey shows that about 44% of families could need help keeping ends meet within six months of losing their primary breadwinner. In Texas, almost 11% of the residents have no insurance, which is why affordable insurance is very important. Inexpensive and uncomplex plans like term life insurance can help these families. With a very small monthly payment, they can continue living standards even after suffering a loss.
Final Thoughts
Term life insurance is one of the most inexpensive, simple, and straightforward policies. Even if you think you can’t afford most insurance policies, you can get a plan of term life insurance that you can afford. Generally, $30-$50 monthly is not huge, and it adds up as the years go by. So, it does not cause a dent in your monthly budget as a whole life insurance can. By choosing the right term length and coverage amount after fully considering your financial needs, you can be stress-free about your and your family’s future financial needs. If you feel confused or do not know how to calculate your coverage, we can help you. Our insurance experts at AWH can take your appointment and walk you through the process step by step. If you need help calculating, our AWH website insurance calculator is also user-friendly. You can book a free consultation with us and begin your pathway towards your peace of mind and your family’s financial security.