What Is Term Life Insurance?How Does It Work?

Nikhil Goswami

Term life insurance is one of the most basic forms of life insurance. It provides coverage for a specific period, called the term, and pays out a pre-determined benefit to your beneficiary if you die during that period. It is unlike whole life insurance, which never expires.

If you’ve heard of term life insurance but aren’t sure how it works or if you need it, you don’t have to worry. This article will give you all the information you need to make an informed decision about getting some term insurance. Hence, you can protect your family when unexpected things happen in your life.

Key Takeaway

A guaranteed death benefit is the most important feature of term life insurance. Therefore, the insurance company pays it out at the end of your policy term regardless of how long it takes you to die.

Term life premiums depend on your life expectancy, health, and age. For example, the younger you are, the more expensive it will be for the insurance company to cover you for a long time. 

The firm will have to pay more if something happens to you while their policy covers you. Policies with shorter durations are available if you want term life insurance but don’t want it for as long as possible.

You can buy a term life policy for 10 to 20 years or more. However, when choosing the coverage level you need, you should decide how long you want it. Remember, higher coverage levels provide greater protection.

When you buy term life insurance, you’re not investing any money in an investment portfolio. Or savings account that will grow over time and payout upon maturity. Instead, you’re paying premiums. 

If something happens to you during your policy term, your beneficiary will receive a lump sum payment. Your beneficiary will then be able to use those proceeds however they see fit.

You can change your term insurance into whole life insurance if your company allows it. However, this involves making additional monthly payments which will increase over time and paying a higher premium at each renewal date.

How Term Life Insurance Works

You can apply for insurance with any company you choose, though some providers may only be available in certain areas. Once you’ve applied and been approved, your provider will send you a policy document that outlines the terms of your coverage.

The insurance provider assesses the risk you desire to insure and determines whether or not they can offer you a policy with the desired coverage at the right price. If so, they will begin processing your application.

The insurance provider may ask for a medical exam to understand your health status. They may also request any other information they feel is necessary to assess your risk and determine what kind of policy they can offer you. This may include questions about any family history of certain diseases and lifestyle choices like smoking habits or excessive drinking.

The next step is for you to choose a term length. This is how long your policy will stay in effect. The longer the term, the more expensive your monthly payments will be. However, it also means your beneficiaries will get more money when you pass away. If you have small children or other dependents who rely on your income for support, it might be worthwhile to consider getting a longer-term policy.

Decide the amount of death benefit you want. This is simply the amount your beneficiaries would receive if something happened to you and they needed to use this coverage. You’ll want to choose an amount that will help them pay any debts or other expenses they might have.

Finally, name the beneficiaries who will receive guaranteed death benefits from the policy if something happens to you during its duration. This could be family members or friends who depend on your income or charities that support causes close to your heart. Thatsaid, nowadays, many individuals prefers to invest in money mutual funds however its recommended to always do some research work before investing in such platforms. 

Popular Term Life Insurance Companies


Company Best For Our Rating AM Rating
Protective Overall Best 4.6 A+
MassMutual Financial Stability 4.5 A++
Mutual of Omaha Living Advantages 4.4 A+
Banner Lowest Cost 4.2 A+
Haven Life Same Day Cover 4.0 A++
Nationwide Client Satisfaction 4.7 A+


Example Of Term Life Insurance

Term life insurance is vital in planning your future and protecting your family’s financial security. For example, let’s say you’re 35 years old, have a wife and two children, and you buy a 10-year term life insurance policy at $400 000 with a $40 per month premium. If you die before the 10 years are up, your beneficiaries will receive $400 000 cash from the insurance company. However, if you live past 45 years old, there will be no benefits. You’ll have lost out on $40 per month for nothing!

Types Of Term Life Insurance

The most common types of term insurance are;

  • Level-Premium/Level Term Policies

A level-premium policy is just what it sounds like: You pay the same amount for your coverage every month until it expires, at which point the coverage ends. These policies are typically used when you have a lot of money saved up and don’t need to worry about budgeting for monthly premiums or when you’re only going to need coverage for a short period.

This policy lets you choose a certain amount of coverage and then pays your beneficiaries that same amount every month for a specified period—usually 10, 20, or 30 years.

Level-premium policies are generally the most affordable option for people who want life insurance but can only afford to pay for it over time. The monthly payments tend to be lower than other types of policies. Besides, the premiums don’t increase over time like decreasing term policies. 

On the other hand, there are numerous kinds of insurance available like rental car insurance and motor insurance, offerd by the most reputed companies. However, most of the times such companies looks for good credit score, a score of 720 and above is considered good, 640 and below is deemed to be poor.

  • Yearly Renewable Term Policies

Yearly Renewable Term (YRT) Policies are ideal for those who want to continue coverage after their term expires. Or for those who prefer not to make a long-term commitment. YRT policies are also known as “renewal terms” because they allow you to renew your policy each year until you no longer want it.

When you create a yearly renewable term life insurance policy, the initial term of coverage is typically set. Thus, it will expire at least one year after the date of issue. Each year after that, your insurer will send you a renewal notice. They will inform you that your policy is about to expire and ask whether or not you would like to renew it.

 If you decide to remain insured, all the premiums paid up until that point will be applied towards the new premium amount for the next year of coverage. If you decline the renewal offer from your insurer, they will return to you in full any remaining premiums paid up until that time. That is usually less any applicable fees such as administrative fees charged.

  • Decreasing Term Policies

Decreasing term policies are also known as decreasing term life insurance. With decreasing term life insurance, the premium payment goes down each year. This benefits those who cannot afford to pay a higher premium at the beginning of their policy.

Decreasing term life insurance is an excellent option for those who need life insurance protection but cannot afford to pay a high premium upfront. Paying less each year can spread the cost over time while still getting coverage throughout your lifetime.

You can purchase a decreasing term policy to pay off your mortgage. The policy will have a fixed amount of coverage for the first few years, decreasing over time. This allows you to stay current on mortgage payments while also covering some of the cost of your home loan.

Benefits Of Term Life Insurance

Term life insurance should be an integral part of your financial plan. It can help you protect your family if something unexpected happens to you. However, many people don’t understand why they should consider term life insurance. In this section, we’ll cover the benefits of term life insurance.

  • Flexible

You can pay your term life insurance premiums annually, quarterly, or monthly. You can also increase or decrease the amount of coverage without any restrictions. In addition to these flexibility benefits, there are no required medical examinations to keep your policy in force and no need for blood tests when you renew your policy.

This flexibility may be attractive since you don’t have to pay for coverage that might not be necessary for you at any given time.

  • Easy To Understand

Term life insurance is easy to understand. There are no complicated calculations or interest rates to figure out, so you don’t have to worry about getting a headache when shopping for it.

It’s also easy to compare term life insurance quotes from multiple companies because most use the same basic table format and only vary in their specific pricing strategies. This can help you find the best possible deal while minimizing costs.

Term life insurance is also one of the most accessible types of coverage available today because there are no complicated requirements like high deductibles if something happens (like an accident) while covered under your policy. Make sure you keep paying your premiums on time every month, and all will be well if anything terrible happens down the road!

  • Cheap

One of the biggest reasons that term life insurance is considered to be cheap is because it’s a fixed amount. As opposed to whole life insurance, which has both a death benefit and an investment component, with term life, you’re just paying for coverage—not for anything else. Since you only need protection for a certain amount of time, there won’t be any additional premiums or fees after your policy expires unless you decide to renew.

  • Tax Exemption For Payouts

The payments you receive from a life insurance policy are tax-free if you designate them to go to your beneficiary. This is a huge benefit because it allows your beneficiaries to keep more of their money, which can help them pay off any debts they owe. It also means that they won’t need to worry about losing the money they received if the IRS audits them.

  • Best For Young Families

If your family is young, or you don’t have the cash flow to afford whole life insurance, term life may be a good option. Insurance can be an important part of a young family’s means to maintain their lifestyle in the event of an untimely death. However, obtaining enough money for any life insurance policy can be challenging with no savings and limited income. Term life insurance is often a better choice as it provides coverage at lower rates than whole-life policies while paying out upon death instead of keeping premiums until maturity.

Term Life Insurance Vs. Permanent Life Insurance

The difference between term life insurance and permanent life insurance is that term life insurance is temporary coverage, and permanent life insurance is long-term coverage. Term life insurance pays your beneficiaries a lump sum, providing a specific coverage period such as 10 or 30 years.

The permanent life policy continues until you die. Both coverage goals are to provide your family with an income in the event of your death. Usually, there are factors to consider before choosing between term life insurance and permanent life insurance. Here’s what you should think about:

  • Cost Of Premiums

Generally, term life insurance premiums are less expensive than permanent life insurance premiums because they are fixed for some time, like 10 years. Your premium rate will not rise after you purchase the policy. However, if you want to maintain your coverage for longer, you may need to buy additional coverage later. Hence, it will increase your premium payments over time.

  • Availability Of Coverage

Permanent life insurance policies offer more flexibility regarding how long you can keep them in force and how much coverage you can afford. They have no expiration dates or caps on how much money can be paid out in claims over time (assuming sufficient funds are in the policy). Term policies limit how long they stay in force and have maximum payout amounts specified in the policy documents. The insurance company cannot exceed them by any amount.

  • Investment Value

Permanent life insurance is often sold as investments that offer growth potential. This means that your premiums will be invested in mutual funds or stocks. You will also receive dividends from these investments as long as they remain in force. If you opt for this type of coverage, you can expect to earn some extra income from your policy even after it expires. On the other hand, term life insurance does not offer this advantage because its premiums are not invested in any way.

  • Other Factors

Attractive Rate Of Return

If you’re looking for a way to invest money, then getting a high return on your investment is important. Permanent life insurance policies can provide an investment option that offers a higher rate of return than savings accounts or CDs. However, most policies won’t offer as much as investing in stocks or mutual funds.

Insurance Coverage From Policyholders

Permanent life insurance policies are designed to protect your family for their lifetime. On the other hand, term life insurance protects you from financial loss in the event of your death. A term life policy will pay out a lump sum if you die during the term. The money paid out can cover funeral costs and other final expenses, allow your loved ones to pay off debts, or cover any outstanding debts.

Extra Features And Loans For Permanent Policy

Permanent policies offer several extra features, including cash value accumulation. You can save money in this account, which will grow over time with interest. If you need extra money before your policy expires, you might be able to borrow against it. You can take out a loan from your insurer or sell some of your policy’s cash value. 

These loans are usually at a fixed interest rate with no prepayment penalty for paying back early, although there may be some fees. This means your income decreases significantly after taking out the loan, and you can’t pay.

Term Life Insurance Vs. Convertible Term Life Insurance

Convertible term life insurance is a form of term life insurance that you can convert into permanent coverage. It’s ideal for young and healthy people who want to start with life insurance early so they can take advantage of lower rates.

Unlike term life insurance, when you buy a convertible term life insurance plan, you may be required to pay an additional premium for the conversion feature. This additional cost adds up to your regular premium payments. Thus, you’ll have to pay more each month than you would if you had chosen another type of term policy.

The biggest advantage to convertible term life insurance is that it’s typically less expensive than permanent coverage. The premiums are lower because there’s no guarantee that the policy will be converted into an individual policy at any point. Therefore, there’s less risk for the insurer that they’ll eventually pay out more than they took in from premiums.

Convertible term policies can pay dividends when rates go down, as they often do. They allow you to take advantage of lower rates than you would have been able to get on a new individual policy.

The convertible term also allows you to purchase additional coverage if necessary. For example, if your children are older and need more financial support, it gives you more flexibility than traditional whole life policies.

The policy has some disadvantages as well. It has no cash value build-up. This can be a problem if you want to invest in something else. Besides, you may only get temporary protection. If you want longer-term coverage, convertible term life insurance may not be suitable for you. The term can only last for a specific period before you renew again at the end of each year.

What Is the Difference Between Whole Life Insurance Coverage And Term Life?

Whole life insurance is another form of permanent life insurance policy. It covers you for your entire life, regardless of age or health status. Whole-life policies are often sold by agents who earn commissions based on the size of the policy. 

Therefore, they may not be in your best interest financially. However, they can be helpful in case of an emergency where you need money quickly without having to pay hefty premiums each year. Besides, a whole life policy guarantee is subject to issuing company claims-paying ability and prompt payment of all the needed premiums.

Term life insurance is a type of permanent insurance that covers a specified amount for a specific period. After the coverage expires, you will no longer be covered. Term life insurance is helpful if you need coverage for a specific period. For instance, when you’re raising children or paying off your mortgage.

Term life is typically much cheaper than whole life because no ongoing fees are associated with it once the term expires. Whole life insurance premiums may cost ten times more than term life. Term life policies have lower rates because they don’t have as much risk associated with them compared to whole life policies. This is due to their shorter duration, and lack of ongoing costs after the expiration date has passed.

Can You Get Your Cash Back When Term Life Insurance Policy Ends?

No, you don’t get your money back at the end of a term life insurance policy. If you have a term life insurance policy, your premiums will be fixed and will not change during the term of coverage. When the policy expires, you will no longer pay premiums, and there is no refund of premiums paid. Your coverage ends when the policy expires.

However, if you cancel your coverage before the end of its term and for any reason, then you can receive a refund for any premium payments made to date.

Is Term Life Insurance Worth Getting?

Term life insurance can be a good investment if you do your homework and shop around. It is cheap in the short term but doesn’t last as long as permanent insurance. Permanent insurance lasts as long as you pay your premiums and can be used to cover funeral costs or to leave behind a legacy for your family.

The best way to decide which kind of policy is right for you is to consider how long you need coverage. If you’re young and healthy and don’t have any dependents or debts, term life will probably be sufficient for your needs. If not, then getting permanent coverage might be more worthwhile.

What Happens If You Stop Paying Term Life Insurance Premiums?

If you stop paying your term life insurance premiums, your policy will lapse. In many cases, the lapse of a term life insurance policy means that the entire amount of the death benefit has been forfeited. This can be a big loss for your family and loved ones if they count on that money to pay off debt or help with funeral expenses.

However, there are some exceptions to this rule. There may be provisions if you’re paying term life insurance through an employer-sponsored plan. Meaning you can reinstate coverage after a lapse. If you have an individual policy, check with your agent or broker. This way, you’ll know whether there is any chance that you could reinstate coverage after it lapses.

How Can You Cancel A Term Life Insurance Policy?

If you’ve decided that you no longer need the coverage, you may be able to cancel the policy. The process may take some time, but it’s easy to do if you follow the proper steps.

Contact your insurance agent or company representative and request them to cancel your term life insurance policy. Ask for a copy of the cancellation form. You’ll use this form to notify the company that you no longer want coverage.

Complete the cancellation form and send it back to your insurance provider. Ensure you keep a copy for yourself. If there are any questions or problems with the process of canceling your term life insurance policy later, it’ll help.

Wait for your life insurance provider’s confirmation that they have received the cancellation request. They will begin canceling your policy as soon as possible following this notice. If they need additional information to process your request, they will contact you directly at this point. Just ensure you give them what they need. Hence, they can complete processing your request for coverage termination soon after receiving notice from you.

Final Thoughts: Is Term Life Insurance Policies Are Cost Effective? 

If you need a death benefit today, consider buying term life insurance. Also, if you are sure you never want to buy another policy, don’t fear the policy. It’s relatively cheap, isn’t haunted by the specter of build-up, and still offers plenty of useful features. Moreover, the policy is far more accessible to most people. 

In other words, go with a term policy if you’re in your fifties or sixties and want to tie up all loose ends by insuring against early death. If you need help finding the right one for your circumstances, get in touch with professionals in the field.


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