What is term life insurance and how does it work?

Term life insurance pays a set amount of money to the people you name if you die within a fixed number of years, and it costs less than any other kind of life insurance because the coverage ends instead of lasting your whole life. Most policies run 10, 20 or 30 years, and both the payout and the premium stay the same the entire time.

Match the payout to what your household would still owe and still spend without your income, and match the term to the years someone would feel that loss. A policy that misses on either one expires too early or pays too little on the day your family files the claim.

Rates climb every year you wait. A woman in good health pays $290 a year for $500,000 of 20-year coverage at 35 and $845 at 50, because insurers price on the odds of paying the claim, and high blood pressure, high cholesterol and diabetes all turn up far more often in your 40s and 50s. Applying before your next birthday, and before a diagnosis lands in your medical records, locks the lower price into every year of the term.

How does term life insurance work?

A term life insurance policy pays your beneficiaries a lump sum if you die while the policy is active, in exchange for a premium you pay monthly or annually. Nearly everyone buys level term, which pays the same amount whether you die in year one or year 19, and the 20-year policy sells more than any other length.

Your beneficiaries spend the money on whatever they need, most often the mortgage, groceries and childcare. They owe no federal income tax on the payout, though interest the insurer adds while processing the claim counts as taxable income.

A term policy builds no cash value and refunds nothing if you outlive it. That trade buys you more death benefit per dollar than any other type of coverage, which is why a working parent can protect a household for the price of a phone plan. Insure.com breaks down the variations in its guide to term life policies.

Answer the health and tobacco questions honestly on the application. Insurers verify your answers, and false statements can reduce or cancel the coverage after you die, which hands your family a denial after years of paid premiums.

How much term life insurance do you need?

Experts recommend at least 10 to 15 times your income in life insurance coverage, but the exact amount you need will depend on your situation. Your payout should cover what your household would still owe and still spend once your income stops. Add these up, then subtract what you already have set aside.

• The mortgage balance and any debt someone co-signed. Paying these off with the death benefit removes the payment that would otherwise come out of one paycheck.
• Several years of your income. Multiply your annual pay by the years until your youngest child supports themselves, which keeps the household running the way it runs now.
• Childcare, tuition and the unpaid work you do at home. A surviving parent who has to buy full-time childcare adds a five-figure expense in the first year alone.
• What your savings and workplace policy already cover. Subtract your emergency fund, investments and the death benefit from your job, then buy a policy for the amount that’s left.

Buy for the life you are about to have if you rent and have no children yet. A 28-year-old planning to buy a house in three years and start a family in five should size the policy around the mortgage and childcare costs coming, because applying at 28 instead of 33 locks a lower rate on coverage that has to last into their 40s.

How long should your term life insurance policy be?

Your term should last at least as long as your mortgage and at least until your youngest child finishes school, whichever date lands later. Buy a 30-year policy at 35 with a 30-year mortgage and your family owns the house outright no matter which year you die.

• Count the years left on your mortgage, not the length of the original loan. With 23 years remaining, a 20-year policy leaves three years of payments uncovered, so round up to a 30-year term.
• Count the years until your youngest child finishes school. A 20-year policy bought while that child is a toddler expires the year they graduate college, right when they start earning.
• Buy one long policy instead of a string of short ones. Every application prices you at your age and health in the year you apply, so a 30-year term at 35 costs less than a 20-year term plus a replacement policy at 55.
• Apply before you turn 50 if you want 30 years of coverage. Most insurers will not write a term ending past age 80, which shortens your options every year you wait.

How much does term life insurance cost?

Term life insurance costs a 35-year-old woman in good health $290 a year for $500,000 of 20-year coverage and a 35-year-old man $343, based on our data. That same woman pays $1,275 for the same policy at 55.

Most people expect a much bigger number. Healthy adults aged 18 to 30 priced a $250,000 20-year policy at 10 to 12 times what it actually costs, according to LIMRA and Life Happens, so pull a quote before you rule out the premium.

Twice the coverage does not cost twice as much. A 40-year-old woman pays $386 a year for $500,000, and $1 million runs her $690 rather than $772. Get quotes for both amounts and take the bigger policy if the extra $304 fits your budget. 

The chart below lists average annual premiums for 20-year policies at $500,000, $750,000 and $1 million, by age and gender, for nonsmokers in good health.

Average insurance cost for 20-year-term life insurance policy

$500,000

Age	Gender	$500,000
25	Female	$242
25	Male	$299
30	Female	$254
30	Male	$314
35	Female	$290
35	Male	$343
40	Female	$386
40	Male	$470
45	Female	$564
45	Male	$723
50	Female	$845
50	Male	$1,111
55	Female	$1,275
55	Male	$1,768
60	Female	$2,180
60	Male	$3,067
65	Female	$4,166
65	Male	$5,918

$750,000

Age	Gender	$750,000
25	Female	$329
25	Male	$414
30	Female	$345
30	Male	$439
35	Female	$399
35	Male	$479
40	Female	$547
40	Male	$670
45	Female	$809
45	Male	$1,046
50	Female	$1,232
50	Male	$1,630
55	Female	$1,869
55	Male	$2,616
60	Female	$3,231
60	Male	$4,580
65	Female	$6,216
65	Male	$8,843

$1,000,000

Age	Gender	$1 million
25	Female	$389
25	Male	$519
30	Female	$424
30	Male	$545
35	Female	$496
35	Male	$607
40	Female	$690
40	Male	$849
45	Female	$1,025
45	Male	$1,337
50	Female	$1,539
50	Male	$2,086
55	Female	$2,443
55	Male	$3,369
60	Female	$4,152
60	Male	$5,967
65	Female	$7,863
65	Male	$11,259

What affects your term life insurance rates?

Your age, health, tobacco use, family medical history, job and coverage amount set your term life insurance rate. Insurers price the odds of paying your claim before the term ends.

• Age moves the price the most. A 40-year-old woman in good health pays $386 a year for $500,000 of coverage, and that number climbs every year she waits.
• Health conditions cost you the best rate. The same 40-year-old woman pays $650 at an average-health rate, which is where high blood pressure, a high body mass index or a cancer history put her.
• Nicotine use puts you in a smoker rate class. Cigarettes, cigars, vaping and chew all count, and smoker rates run several times higher than nonsmoker rates at the same age.
• Family history counts when your own record is clean. A parent or sibling diagnosed with heart disease or cancer before 60 can drop you a classification.
• Your job and hobbies show up in the quote. Skydiving, private flying, a DUI or commercial roofing work all raise what you pay.

Should you get term or whole life insurance?

Term life insurance costs less and expires on a set date, while whole life insurance costs more and pays out whenever you die. Term fits most families, because a mortgage gets paid off and children grow up.

Buy term and put what you save on premiums into a 401(k) or IRA. Set that transfer to run automatically the day your premium clears, since the plan only works if you actually invest the money. Skip that step and you reach the end of your term with no savings and a much higher price, because a woman in good health pays $290 a year for $500,000 at 35 and $1,275 for the same policy at 55.

Whole life makes sense in a few specific situations, like a child with a disability who will need financial support for life or an estate whose heirs would have to sell property to cover taxes. Talk to a certified financial planner before you commit to one, since you will pay those premiums for decades and the NAIC warns that poor health can stop an insurer from approving you if you drop the policy and try to buy again later.

What happens when your term life insurance policy expires?

When your term life insurance policy expires, your coverage stops on the last day of the term and you are not refunded any of the premiums you paid. Before your policy expires, you have a few options: 

• Convert to permanent coverage before the conversion window closes. A convertible policy lets you move into whole or universal life without proving you are still insurable, priced at your age on the conversion date.
• Renew the coverage you already have. Most term policies renew even after your health changes, at a higher premium, and the right to renew ends at a set age. Ask for the renewal price and that age cutoff before you count on this.
• Apply for a new policy. A nonrenewable policy cannot continue, so you start a fresh application at your current age and health. Begin six months early to avoid a gap if underwriting runs long.
• Let the policy end. With the house paid off and nobody living on your income, dropping the premium frees that money and costs you nothing.

Who needs term life insurance?

You need term life insurance if someone would have to change how they live because your paycheck stopped. That covers more households than most people assume.

• Parents of children under 18. The payout replaces the income that feeds and houses them until they support themselves.
• Anyone sharing a mortgage. A surviving partner keeps the house instead of selling it to escape a payment built for two incomes.
• Stay-at-home parents. Replacing full-time childcare, driving and household work costs a surviving spouse tens of thousands of dollars a year.
• Business owners who personally guaranteed a loan. Lenders come after your estate, and a policy pays the debt so your family keeps what you left them.

You can skip it if nobody depends on your income and you share no debt. Retirees with the mortgage paid and enough savings for a surviving spouse fall into that group, along with adults whose only debt would die with them.

What to do before you buy a term life insurance policy

Get the agent’s answers in writing on how the policy behaves after you sign it, then set up the paperwork so the money reaches the right person.

• Confirm whether the rate stays guaranteed for the full term. Some policies lock the price for only the first few years and then reprice you, which turns a $290 premium into a much larger one halfway through.
• Confirm the conversion deadline and which permanent policies you can convert into. That window usually closes years before the term does, and missing it costs you the option to keep coverage without a new medical exam.
• Confirm what happens if a payment arrives late. Coverage ends once you pass the grace period, and buying it back means paying at your current age and health.
• Name an adult or a trust as your beneficiary rather than a minor child. Insurers will not pay a minor directly, so the money waits until a court decides who controls it.
• Add a contingent beneficiary. If your primary beneficiary dies before you do and no backup is listed, the payout goes to your estate, where probate delays it and creditors can reach it.
• Return the policy for a full refund if you change your mind. The review window runs about 10 days from the day the policy arrives and appears on its first page — though this varies by insurance company. 
• Put the premium on autopay and revisit the policy after a birth, marriage, divorce or job change. You can update beneficiaries at no cost, and an outdated form sends the money to the wrong person regardless of what your will says.

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