Term Life Insurance

A term life insurance policy provides life insurance coverage for a fixed period (the “term”) — typically 10, 20, or 30 years. If you die during the term, the insurance company pays a tax-free death benefit to your beneficiaries. Term insurance is the cheapest and simplest form of life insurance.

How it works

You purchase a term life insurance policy with a death benefit (say, $500,000) and a term (say, 20 years). You pay a monthly or annual premium. If you die during those 20 years, the insurance company pays $500,000 tax-free to your beneficiary.

If you do not die during the 20 years, the policy expires. You have no refund; the premiums paid were the cost of the coverage you had.

Types of term insurance

Level term. Premium stays the same throughout the term. Most common and easiest to budget.

Annual renewable term (ART). Premium is lowest initially but increases each year. You do not have to re-qualify medically. Good for people expecting shorter coverage needs.

Decreasing term. Benefit decreases each year; premium stays flat. Used for mortgages or debt that declines over time.

Cost comparison

Term insurance is dramatically cheaper than permanent policies. For a healthy 35-year-old:

• 20-year term, $500,000 benefit: ~$30–$50/month
• Whole-life policy, $500,000 benefit: ~$300–$500/month

This difference compounds over decades, which is why term is recommended for most people.

Who needs term insurance

• Parents with dependents. If you die, who funds your child’s upbringing, education, and the mortgage?
• Single earners. If you are the primary income and a spouse or dependents depend on you.
• People with debt. Mortgage, student loans, or other obligations beneficiaries would inherit.
• Young workers. When you are healthy and premiums are cheap.

As a rough rule: carry 8–12 times your annual income in term insurance.

No cash value or investment component

Term insurance is “pure insurance” — you pay a premium, and the money goes to pay claims and expenses. If you do not die, you get no refund. There is no cash value, no investment component, no retirement account.

This is why term is so cheap: every dollar goes to covering risk, not building savings.

When term expires

When a level term policy expires (e.g., after 20 years), coverage ends. At that point:

1. Let it lapse. If you no longer need life insurance (kids are grown, debt is paid, you have substantial assets), you simply stop paying.
2. Convert to permanent policy. Many policies allow conversion to whole-life or universal-life without medical re-qualification. This is valuable if your health has deteriorated.
3. Buy new term. If you still need coverage, you can buy a new term policy, though premiums will be higher (you are older).

Medical underwriting

Most term policies require a medical exam or at least health questions. Younger, healthier people get lower premiums. If you have health conditions, you may be declined or offered higher rates.

For small amounts ($50,000 or less), some insurers offer “simplified” or “guaranteed” issue with no exam.

See also