How does term life insurance work? (2024)
Most term life policies provide coverage for 15-30 years, and longer terms come with higher rates. Term life insurance costs $26 monthly, but your rates will vary based on age, gender, and policy length. Unlock the mysteries of, "How does term life insurance work?" and compare it to whole life insurance.
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Michael Leotta
Insurance Operations Specialist
Michael earned a degree in Business Management degree with an insurance focus, which led to a successful 25-year career in insurance claims operations and support. He possesses a high-level of business acumen across multiple areas of the insurance industry. Over the course of his career, he served in multiple roles supporting claims operations including: Claims Specialist, Claims Trainer, Claim Au...
Insurance Operations Specialist
UPDATED: Mar 27, 2024
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Editorial Guidelines: We are a free online resource for anyone interested in learning more about insurance. Our goal is to be an objective, third-party resource for everything insurance related. We update our site regularly, and all content is reviewed by insurance experts.
UPDATED: Mar 27, 2024
It’s all about you. We want to help you make the right coverage choices.
Advertiser Disclosure: We strive to help you make confident insurance decisions. Comparison shopping should be easy. We are not affiliated with any one insurance company and cannot guarantee quotes from any single insurance company.
Our insurance industry partnerships don’t influence our content. Our opinions are our own. To compare quotes from many different insurance companies please enter your ZIP code above to use the free quote tool. The more quotes you compare, the more chances to save.
On This Page
- Term life insurance is usually offered with 10-, 20-, or 30-year terms in which a policyholder pays a monthly fee for a predetermined coverage amount
- Term life insurance is usually more affordable than whole life insurance but doesn’t offer cash value
- Term life insurance rates can vary by age, gender, coverage amount, health status, and the company you choose
Welcome to our guide on term life insurance! If you’re curious about how term life insurance works and want to make informed decisions about your coverage, you’re in the right place. In this article, we’ll demystify the intricacies of term life insurance, including its purpose, benefits, policy terms, and coverage options.
We’ll also explore factors to consider when choosing a policy, such as the duration of coverage, death benefit amounts, and premium costs. By the end, you’ll have a clear understanding of how term life insurance works and be equipped to protect your loved ones financially.
To get started, simply enter your ZIP code and compare rates from the best insurance providers in your area. Secure your family’s future today with this top life insurance quote comparison tool, and find the best 10-year term life insurance policies or the best 20-year term life insurance policies.
How Term Life Insurance Works
How does term life insurance work? Term life insurance is appealing to many people due to its affordability. Knowing how term life insurance works can make life easier for you as a policyholder and for your beneficiaries when it comes time to submit a life insurance claim. So, what is term life insurance?
Term life insurance is a life insurance policy that serves as an agreement between an insurer and a policyholder. In short, the policyholder agrees to monthly payments over a predetermined term, while the insurer agrees to distribute a death benefit if the policyholder dies within that term.
Most life insurance companies that offer term life insurance will have options for 10, 20, or 30-year terms. This simply means that the policyholder will agree to pay for 10, 20, or 30 years. As long as the policyholder is up-to-date on payments, the insurance company should disperse the death benefit when the policyholder dies.
Comparing Term vs. Whole Life Insurance
Term life insurance and whole life insurance are both popular life insurance policy options. While common, these policy options have notable differences in usage and cost. These are the two most significant factors for most people as they compare term life vs. whole life.
How does a term life insurance policy work? One key difference between term and whole life insurance is the payment structure. As noted previously, term life insurance policies are paid over the course of a predetermined term. Whole life insurance differs in that it is typically paid over the course of your life.
Read more: Whole Life Insurance: A Complete Guide
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Some life insurance companies will allow full payment or other similar options while continuing to offer coverage over your whole life, but most people can’t afford that. Another significant difference revolves around the cash value associated with a whole life insurance policy.
Term life insurance offers a significant death benefit, usually in excess of $100,000. At the same time, whole life insurance provides a death benefit while accruing cash value. Many times, a whole life insurance death benefit will be smaller than those seen in traditional term life insurance policies.
Due to the cash value component, whole life insurance tends to be much more expensive on a monthly basis.
The cash value builds over time and can also generate interest. That cash value can be used at a later date to pay policy premiums or cover emergency expenses.
Suppose you can only afford term life insurance now but think you might want whole life insurance in the future. In that case, many companies offer convertible term life insurance. In short, this policy feature allows you to convert from term to whole life insurance in the future.
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What to Consider Before You Buy Term Life Insurance
When getting a term life insurance policy, you should consider the coverage amount and term length that would best meet the financial needs of your beneficiaries in the event of your passing. Any major debts, financial obligations, and future expenses, such as college tuition, will influence how much term life insurance you need.
If you need life insurance coverage for 35 years or more, consider getting quotes for whole, or permanent life insurance. This type of policy is much more expensive but provides coverage that lasts your whole life instead of a set number of years.
The Term Life Insurance Application Process
The time it takes to get term life insurance coverage can vary, but the application process typically involves a medical exam and can take a few weeks to complete. However, some providers offer simplified issue policies that do not require a medical exam and can be approved more quickly.
Term Life Insurance Quote Comparison
Term life insurance varies in price greatly based on a handful of factors. Some key pricing factors are age, gender, health, and the coverage amount. From there, you can expect subtle differences in price from each life insurance company you request a personalized quote from.
As a general rule of thumb, males tend to pay more than females, and older adults will pay more than young adults. Life insurance prices are based on risk to the insurer, and older adults are typically at a greater risk of dying than younger adults.
Average Term Life Insurance Rates by Age and Gender
| Age | $100,000: Male | $100,000: Female | $250,000: Male | $250,000: Female |
|---|---|---|---|---|
| 25 | $11.03 | $10.02 | $22.10 | $12.91 |
| 30 | $11.12 | $10.07 | $15.31 | $13.02 |
| 35 | $11.12 | $10.07 | $15.42 | $13.02 |
| 40 | $12.65 | $11.12 | $17.94 | $15.21 |
| 45 | $14.57 | $13.31 | $21.55 | $19.69 |
| 50 | $18.60 | $17.20 | $30.19 | $27.02 |
| 55 | $24.51 | $20.61 | $42.88 | $34.35 |
| 60 | $35.88 | $27.48 | $71.10 | $50.86 |
| 65 | $51.06 | $37.76 | $109.82 | $75.14 |
Above, you can get a general idea of how much you might expect to pay for life insurance if you’re a healthy adult. Any major health concerns will quickly raise your term life insurance rates. Otherwise, prices shouldn’t be drastically different from the averages above.
You may also be eligible for discounts on your life insurance, such as for having multiple policies with one provider or even by your occupation. For example, you can see educator discounts in our article Best Life Insurance for Teachers.
If you truly want the best term life insurance quotes, you’ll want to be sure you compare rates from multiple life insurance companies. Every company seems to emphasize different pricing variables uniquely so that rates can differ in many situations.
Sample Term Life Insurance Rates for a 30-year, $100,000 Policy
| Age | AIG | Farmers | MassMutual | Nationwide | State Farm | Transamerica |
|---|---|---|---|---|---|---|
| 25 | $13.87 | $23.85 | $14.01 | $15.75 | $20.01 | $13.67 |
| 30 | $14.96 | $26.68 | $14.71 | $15.40 | $21.84 | $13.76 |
| 35 | $14.96 | $35.35 | $15.58 | $17.80 | $23.84 | $14.79 |
| 40 | $19.56 | $53.10 | $19.75 | $21.72 | $31.32 | $20.12 |
| 45 | $25.22 | $78.27 | $27.15 | $30.08 | $42.02 | $27.35 |
| 50 | $40.10 | N/A | $42.81 | $44.86 | N/A | $40.94 |
| 55 | $75.40 | N/A | $79.87 | N/A | N/A | $73.79 |
Above, you can see sample quotes for a 30-year term life insurance policy with $100,000 in coverage. While there isn’t a major difference in monthly premiums, $10 more per month can add up to over $3,000 over the course of the entire term. Why would you pay more if you didn’t have to?
And, for example, for the best term life insurance for a 40-year-old, Farmers has the highest quotes, while a State Farm term life insurance quote is in the middle.
The lowest rate for the best term life insurance goes to AIG. As you can see from the AIG term life insurance rate chart, the rate is slightly less than it is for MassMutual.
Read more:
- AIG vs. Farmers Life Insurance: Which is better?
- State Farm vs. MassMutual Life Insurance: Which is better?
Most term life insurance policies offer level premiums which simply means your monthly bill won’t ever change. Some companies may offer increasing or decreasing premiums if you anticipate income changes in the future. Increasing term life insurance policies are a little more complex.
Term Life Insurance Ratings and Claims
Price is certainly important when analyzing a term life insurance policy. Before you commit to any life insurance, you’ll want to be sure that the company is rated highly and that there aren’t any major concerns regarding the claims process.
There are a handful of organizations that are reliable for life insurance ratings. Some examples include:
- A.M. Best
- National Association of Insurance Commissioners
- Standard and Poor (S&P)
- Fitch
- Moody’s
- J.D. Power
Each of these organizations can provide insight into an insurer’s current financial strength, financial outlook, customer complaints, and more. If one or more organizations have derogatory remarks on a company, you might want to consider an alternative.
Otherwise, you’ll want to investigate your prospective insurance company’s claims process. Although your beneficiary is the one who will actually initiate this process, you can help by making sure the company you choose has an efficient process with clear instructions.
Jeffrey Manola Licensed Insurance Agent
You can even look to see what information is required on the claims forms, so you have it all in one place for them. Some insurance companies might require your social security number, in which case you should supply this to your beneficiary.
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Case Studies: Understanding How Term Life Insurance Works
Case Study 1: Sarah’s Financial Security
Sarah, a 35-year-old married woman with two children, wants to ensure her family’s financial security if something were to happen to her. She decides to purchase a 20-year term life insurance policy with a death benefit of $500,000. Sarah pays regular premiums throughout the policy term, and if she passes away during this period, her beneficiaries will receive the full death benefit amount.
This allows Sarah to have peace of mind knowing that her loved ones will be financially protected until her children are financially independent.
Case Study 2: John’s Business Obligations
John, a 45-year-old entrepreneur, has recently started a business and has taken on significant loans to fund its growth. He understands that his untimely demise could burden his family with the responsibility of repaying these loans. To protect his family’s financial well-being and ensure the business remains unaffected, John opts for a 15-year term life insurance policy.
The death benefit of $1,000,000 will provide sufficient funds for his family to repay the loans and continue running the business smoothly in case of his death within the policy term.
Case Study 3: Amanda’s Mortgage Protection
Amanda, a 30-year-old homeowner, has a mortgage on her house that she shares with her partner. She is aware that if she were to pass away unexpectedly, her partner might struggle to afford the mortgage payments alone. To safeguard her partner’s financial stability, Amanda purchases a 25-year term life insurance policy with a death benefit of $300,000, which is equal to the outstanding mortgage balance.
This way, if Amanda were to die during the policy term, the insurance payout would be used to pay off the remaining mortgage, alleviating the financial burden on her partner.
Case Study 4: David’s Child’s Education Fund
David, a 40-year-old father, is concerned about his child’s future education expenses. He decides to take out a 20-year term life insurance policy with a death benefit of $250,000, which would be sufficient to cover his child’s college tuition fees and other educational costs.
If David passes away during the policy term, the insurance proceeds would be earmarked for his child’s education, providing them with the necessary funds to pursue their academic goals.
Case Study 5: Michael’s Debt Repayment
Michael, a 40-year-old individual burdened with substantial debts, wanted to protect his loved ones from inheriting his financial liabilities. He obtained a 15-year term life insurance policy with a coverage amount of $500,000, equal to his outstanding debts.
Sadly, Michael passed away in the 10th year of the policy term. The death benefit was used to repay his debts entirely, ensuring that his family did not bear the financial burden he left behind.
How Term Life Insurance Works: The Bottom Line
Committing to term life insurance is an important decision with years’ worth of ramifications. Once you get your personalized quotes, you can expect to pay a set premium until the end of your policy term or until you pass, whichever comes first.
We hope you now have the answers you need to, “What is term life insurance and how does it work?” Before you go, enter your ZIP code below to start term life comparisons and get the best life insurance quotes from various term life insurance companies today.
Frequently Asked Questions
What is term life insurance?
Term life insurance is a type of life insurance that provides coverage for a specific period of time, or term. If the insured person dies during the term, their beneficiaries receive a death benefit.
See our article Life Insurance Beneficiary: Insurance Terms Explained.
How does term life insurance work?
When you buy a term life insurance policy, you choose a coverage amount and a term length, usually 10, 20, or 30 years. You pay a premium each month for the duration of the term. If you die during the term, your beneficiaries receive a death benefit equal to the coverage amount.
Do you get your money back at the end of a term life insurance?
No. Unlike whole life insurance, term life insurance policies have no cash value and no value other than a death benefit. So there is no payout after the term expires. This is why term life insurance is less expensive than whole life insurance.
What happens to term life insurance at the end of the term?
If you outlive your term life insurance policy, your coverage ends and you don’t receive a payout. However, you can typically renew your policy for another term or convert it to a permanent life insurance policy.
What are the benefits of term life insurance?
The main benefit of term life insurance is that it provides affordable coverage for a specific period of time. It can help cover expenses like mortgages, college tuition, and other debts in the event of your death.
What are the disadvantages of term life insurance?
If you outlive the term length, your coverage ends and you won’t receive any benefits. You won’t be covered your entire lifetime and your policy won’t accumulate cash value like an investment account does.
Which is better term or whole life insurance?
Deciding between term life vs. whole life insurance depends on your lifestyle. Permanent policies last your whole life and come with investment opportunities not available with term life. Term life insurance may not last your whole life, but rates are significantly cheaper.
Is term life insurance the right choice for me?
Term life insurance is a good choice for people who need coverage for a specific period of time, such as while they have a mortgage or while their children are in school. It’s also a good choice for people who want affordable coverage.
Why do people prefer term life insurance?
Most people prefer term life insurance because it is much more affordable than whole life, and many companies offer the option of renewing the term or converting it to a permanent policy after the term ends.
How much coverage do I need?
The amount of coverage you need depends on your individual circumstances, such as your income, debts, and dependents. A good rule of thumb is to have coverage equal to 10-12 times your annual income.
How do I choose a term length?
The term length you choose depends on your individual circumstances. Consider the amount of time you need coverage for, such as until your children are out of college or until your mortgage is paid off. Also, consider your age and health, as you may not be able to get coverage for as long if you’re older or have health issues.
How do I buy term life insurance?
You can buy term life insurance through an insurance agent or broker, or online through an insurance company’s website. It’s important to compare quotes and coverage options from multiple providers before making a decision.
You can also review our article 7 Tips to Save Money on Life Insurance.
What are the average term life insurance rates?
The average term life insurance rate is $26 per month, but rates can vary based on factors such as age, health, and the length and amount of coverage. See more in our article Best Life Insurance for Overweight People.
How do whole life rates compare to insurance life rate for term?
Whole life policies on average cost six times more than term life policies.
Can you cash out a term life insurance policy?
You cannot cash out term life policies. Term life insurance provides coverage only and does not offer any sort of cash value benefit. The premiums paid by policyholders are used solely to provide coverage for the financial responsibilities of the insured.
Which are the best term life insurance companies?
According to our guide to the best life insurance companies, Transamerica and Nationwide are the top choice for term life insurance among Generation X and Millennials.
What is the site www.usinsuranceagents.com?
US Insurance Agents provides users with a fast and simple way to get and compare rates for multiple lines of insurance, including life, car, home, rental, and health. Enter your ZIP code into the free online quote tool to start a term life insurance quotes comparison.
The site also includes insurance company reviews, local insurance agents and brokers, and featured articles.
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Michael Leotta
Insurance Operations Specialist
Michael earned a degree in Business Management degree with an insurance focus, which led to a successful 25-year career in insurance claims operations and support. He possesses a high-level of business acumen across multiple areas of the insurance industry. Over the course of his career, he served in multiple roles supporting claims operations including: Claims Specialist, Claims Trainer, Claim Au...
Insurance Operations Specialist
Editorial Guidelines: We are a free online resource for anyone interested in learning more about insurance. Our goal is to be an objective, third-party resource for everything insurance related. We update our site regularly, and all content is reviewed by insurance experts.