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Penny Gusner Consumer Analyst

Term life insurance: How it works

Read the Spanish version: Conceptos básicos del seguro de vida a termino

If your family relies on your income, life insurance is an important part of planning for your family’s future. It’s grim, and no one likes to plan for their death, but a little discomfort now can save your family a world of financial stress should the worst happen.

Why buy term life insurance?

In general, life insurance is purchased to replace your income if you die, so your loved ones can pay debts and living costs. For example, if you and your spouse own a home and you were to die tomorrow, your spouse would have to pay the mortgage on his or her own. If you had the proper term life insurance policy, your spouse would receive enough money from the policy's death benefit to pay off – or at least keep up with – the mortgage. Because of its low cost, relative to other types of life insurance, term life continues to be the most popular life insurance choice.

Term life vs. whole life

Most people ask which is better: term life or whole life, but as with most things, it depends on your specific situation. First of all, whole life is just one form of permanent life insurance, so it’s necessary to review your particular set of circumstances and match it with the insurance type that matches best.

Looking at the table below, ask yourself if you…

Want a lower premium Can afford a higher premium
Want a shorter commitment Want no expiration date
Won’t have many expenses at the end of the term Want money left to beneficiaries
Don’t care about building cash value Want to build cash value
Want a high amount of coverage Want a relatively conservative investment account


Understanding different kinds of life insurance

There are several types of life insurance depending on your needs. This article details term life insurance, but you can get additional information on permanent policies in the chart below.

Policy type Term Life Whole Life

Universal Life

Variable Universal Life
Term length 10, 20 or 30 years Until death Until death Until death
Flexibility No No May adjust premiums and coverage level. May adjust premiums and coverage level.
Investment portion which can be withdrawn, borrowed against or added to death benefit No investment portion. Premium is partially invested in set assets and will build cash value. Premium is partially invested in asset classes that can be adjusted and will build cash value based on market movement. Premium is partially invested and can be managed. Will build cash value based on market movement.
Advantage Low-cost premiums with a high amount of coverage. Low maintenance. Safe and conservative. Lowest price for permanent policy with guaranteed death benefit. Potential for greater gains.
Disadvantage After term is complete and no death benefit has been paid, rates for buying a new policy increase substantially. High premium. Cash value is not guaranteed. Cash value is not guaranteed.


How does term life insurance work?

When you buy a term life policy, you are buying a promise from an insurance company that it will pay your beneficiaries a set amount if you die during the policy’s term. In exchange, you pay a monthly premium to the company for the duration of that term.

Keep in mind these key points about term life insurance:

  • Since you cannot change the amount of coverage within a term policy, if you discover that the amount isn’t sufficient, you would need to buy an additional term life policy to provide extra coverage.
  • The calculations behind life insurance rates are all about life expectancy. That's why life insurance costs more as you get older.
  • If you outlive your policy term, the insurance terminates and you must buy another policy if you still want to carry life insurance. However, the annual premium for another policy could be quite expensive because your older age and any health conditions will be taken into account. That’s why it’s important to choose a suitable term length early in life.

What does term life cover?

Common uses for life insurance benefit

The death benefit amount you choose at the start of your policy does not have an assigned use. Typically, these funds are used to cover funeral expenses, debts, mortgage or replace lost income of the insured party; however, the death benefit can be used by beneficiaries in any way they choose.

Since there is no legal requirement for them to spend it on the items that you planned, it’s wise to choose your beneficiaries carefully. You can also choose multiple beneficiaries, allowing you to split up the money between family members the way you want. Any requirement for how the money should be spent, such as paying off the mortgage or college tuition for children, should be specified in a will.  

Types of term life insurance

There are several kinds of term life insurance:

  • Level premium - For the policy’s time period, say 20 years, your premium stays the same. Many term life policies give you the option to renew your coverage at the end of the term without undergoing another medical exam, although your premiums will rise annually after the level term period – often substantially.
  • Annual renewable term - This gives you coverage for one year with the option of renewing it each year for a specified duration, such as 20 years. With this policy, your rates go up every year you renew and are calculated based on the probability of your dying within the next year.
  • Return of premium - If you’d like to have term life insurance protection in place to provide for beneficiaries but you’re confident you’ll outlive the policy, you could consider "return of premium” term life insurance. Under this type of policy, if no death benefit has been paid by the end of your insurance term, you receive all your premiums back. It pays to shop around for a policy like this, but on the low end you can expect to pay 50 percent more in premiums than comparable traditional term life insurance.
  • Guaranteed issue or simplified issue term Generally used if you have an illness or a troubled medical history, these policies require only a few questions and no medical exam, but you pay a much higher premium in exchange for the guaranteed coverage. That's because the insurance company takes on more risk by insuring people without knowing their medical conditions. Guaranteed issue policies often have "graded" benefits that pay only a partial benefit if you die within the first several years of the policy. A life insurance agent can search the marketplace for a guaranteed issue policy that meets your needs, but even if you have a spotty medical history, an underwritten policy like term life still could be less expensive.
  • Final Expense - If you don’t like answering a lot of questions and you want a small policy just to pay for your funeral, you might consider final expense insurance. This coverage typically pays a lower benefit than conventional term life insurance. You cannot be turned down for this type of policy, but here again you’ll pay more for that convenience.

Choosing the right term life policy

Figuring out which term length you should buy (usually 10, 20 or 30 years) requires a review of your debts, financial needs, dependents' needs – and when all those responsibilities might change. When will your dependents reach financial independence? What are your major debts, such as mortgages or other loans, and when must they be paid off? 

It's a good idea to review your life insurance needs carefully, both when you buy a policy and when you experience a major life change. To stay on top of your life insurance needs, you should:

  • Review your circumstances. Review your situation yearly. If you already have one, read your life insurance policy to make sure it still provides appropriate coverage.
  • Shop around. Life insurance quotes vary considerably among insurers, so do your homework.
  • Sweat the fine print. An insurance policy is a legal document, so read it carefully and make sure that you understand it before signing anything.
  • Be truthful. Answer all application questions accurately. Insurance fraud is a serious crime and companies treat it as such.
  • Maintain your list of beneficiaries. Don’t wait to change them when it’s necessary. And tell your beneficiaries about the insurance – don't pay for a policy that your heirs can never claim because they don't know about the policy or the name of the insurer.

How much can I expect to pay for term life?

The price of your policy will vary depending on your age and other risk factors, but you should never assume that a policy is out of reach because of cost. Eighty percent of consumers misjudge the cost of term life insurance, according to LIMRA.

Find your health profile and desired term length in the chart below to get an idea of your annual premium cost.

Average Annual Premiums for Term Life death benefit of $250,000


Health profile and term lengthAge 30Age 40Age 50Age 60
Female non-smoker 10-year term $218 $246 $453 $909
Female non-smoker 20-year term $276 $347 $697 $1,678
Female non-smoker 30-year term $410 $526 $1,148 $7,300*
Female smoker 10-year term $503 $618 $1,317 $2,657
Female smoker 20-year term $667 $928 $2,010 $4,363
Female smoker 30-year term $1,064 $1,457 $3,301 $13,030*
Male non-smoker 10-year term $218 $287 $567 $1,319
Male non-smoker 20-year term $276 $408 $902 $2,353
Male non-smoker 30-year term $410 $661 $1,547 $7,300
Male smoker 10-year term $503 $775 $1,733 $3,871
Male smoker 20-year term $667 $1,194 $2,773 $6,282
Male smoker 30-year term $1,064 $1,950 $4,197 $13,030*

*Limited quotes available. Data source: Compulife Quotation System as of July 2016.

Smoking costs you in more ways than one

As you can see, the rates for smoking more than doubles the cost of the annual premium. You might not be able to stop aging, but you can definitely stop smoking. After five years, you can likely qualify for non-smoker rates.

You don’t have to be a smoker to get smoking rates. Anything that delivers nicotine into your system, from nicotine patches to e-cigarettes, will garner you higher life insurance rates. Occasional cigar smokers may be able to get less expensive premiums.

Doubling the coverage doesn’t double your rate

When you take care of a family, pay a mortgage, plan for college and all of the other factors involved in your finances, things can add up fast. You don’t want to skimp on the amount of coverage you need.

“Young parents with mortgages should really bump up their term amounts while the coverage is so affordable,” says Penny Gusner, consumer analyst for Insure.com. “It’s a time in life when you have a significant amount of living expenses and debt. Raising your term amount when you are young and healthy is affordable and a good idea, since the rates will increase substantially as you age.”

Difference in rates for female non-smoker, 30-year term

Payout amount






age 30

age 30

age 40

age 40

Annual premium





Difference in rates for a male non-smoker, 30-year term

Payout amount






age 30

age 30

age 40

age 40

Annual premium






How to shop for term life insurance

1.    Use the life insurance calculator to discover how much coverage you should have.

A life insurance calculator takes into account your funeral costs, mortgage, income, debt, education to give you a clear estimate of the ideal amount of life insurance coverage.

2.    Choosing a life insurance company. Insure.com maintains a list of the best life insurance companies based on customer reviews, making choosing a reputable insurer that much easier.

3.    Choosing the length of the policy. Common terms include 10, 15, 20 and 30 years. 

4.    Choosing the amount of the policy. This is the sum your beneficiaries will receive in the event of your death. The amount you choose should depend on a number of factors, including your income, debts and the number of people who depend on you financially. Many policies amounts range from $100,000 to $250,000, but higher and lower amounts are also common.

5.    Medical examination. The exam typically covers your height, weight, blood pressure, medical history, and blood and urine testing.

6.    Initiation of policy. Once your policy is in place, maintaining it is a matter of paying your monthly premiums. From there, if you die while the policy is in force, your beneficiaries receive the face amount of the policy tax-free.

Medical exams for term life insurance

When you apply for term life coverage, you’ll be asked a large set of questions about your personal health history and family health insurance. The insurance company will also probably require a medical exam. Don’t be surprised if you’re asked the same set of questions more than once – first by your agent and then by the paramedical professional who conducts the exam.

Marijuana users also must disclose their drug use, but those who fail to mention this will likely be caught anyway by the medical exam.

Choosing the right term life policy requires a small investment of time, but the benefits can be priceless. The first reason for this is obvious: The right policy will help care for your beneficiaries in case you die. But the second reason, which will benefit you even if you outlive your life insurance policy, is the peace of mind that comes with knowing that you and your loved ones are covered. 

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