HomeBlogWhat Is Term Life Insurance (Explained: All You Need To Know)

What Is Term Life Insurance (Explained: All You Need To Know)

What Is Term Life Insurance?

How do term life insurance policies work?

What are the essential elements you should know!

Keep reading as I have gathered exactly the information that you need!

Let me explain to you what is a term life policy and how it works!

Are you ready?

Let’s get started!

What Is Term Life Insurance 

A term life insurance is a type of life insurance policy where death benefits are guaranteed to the extent the insured person dies during the term of the policy.

In other words, if a person having a term life insurance dies during the term of the policy, his or her beneficiaries are guaranteed to receive the stated death benefits as outlined in the policy.

Just like any other insurance policy, the premiums that you can be asked to pay will depend on various factors such as your age, health condition, life expectancy, and policy payout value.

Policy Features

The main benefit of term life insurance is that it offers death benefits upon the death of the insured person.

Other than the death benefits, term life insurance does not have any other value (such as a savings component or cash value).

The policy coverage is for a fixed period of time making the coverage temporary.

Policy Term

In general, you can purchase term life insurance policies ranging from 10 years, 15 years, or 20 years.

Once the term of the policy expires, you can choose to renew the policy for another term, convert the policy, or let it expire.

Depending on your insurance provider and the terms of your policy, you may be able to convert the policy to permanent coverage or whole life insurance.

Policy Renewal

If you have a term life insurance policy and you wish to renew it upon its term expiration, keep in mind that your insurance company will recalculate the premiums that you will need to pay based on your medical condition, age, and other factors at the moment of the renewal.

In certain cases, the insurance company may even refuse the renewal.

For example, if a person is diagnosed with a terminal illness during the term of a first policy (but has not died), then the insurance company will not accept the policy renewal.

On the other hand, you can also find insurance policies that offer you guaranteed re-insurability.

What Is Term Life Insurance And How Does It Work

Let’s look at how a term life insurance policy works.

Step 1: Find An Insurance Company 

The first step in getting a term life insurance is to shop around and contact different insurance companies offering term life insurance.

Step 2: Get Quotes

Once you have found a reputable company that you will want to deal with, the next step is to ask for a quote.

Your insurance company will provide you a premium quote based on different factors such as the policy payout value, the insured age, gender, and health condition.

To get the right quote, you must decide on the term of your insurance coverage, how much death benefits you want, and how many beneficiaries you are naming.

Step 3: Application Process

Once you’ve decided to move forward with a term insurance policy, you’ll typically need to go through an application process.

During this process, it’s possible that your insurance company may ask for you to provide different records and information so they can validate the information you give them.

They may also ask you to undergo a medical examination to assess your current medical condition.

Step 4: Sign Agreement

Once everything checks out and you are satisfied with the premiums and policy terms, you’ll formalize your term life policy.

Then, in the event of death during the term of the policy, the term life policy will pay out the policy’s face value (sums that are not taxable to the beneficiaries in most cases).

On the other hand, if the policy expires before the death of the insured, there will be no payout on the policy.

Step 5: Expiration of Term

At the expiration of the policy, you may have the option of renewing your term life policy or you can let it expire.

If you choose to renew your policy, your insurance company will recalculate the premiums that you will need to pay based on your age, medical condition, policy value, and other factors considered at the moment of the renewal.

What Are The Different Types of Term Life Insurance

Let’s look at the different types of term life insurance so you have a better understanding of the different options possibly available to you.

Level Term Policy

The level term policy, or level-premium policy, is a type of term life insurance where you have coverage for a period ranging from 10 years to 30 years and the insurance premiums are fixed during the term.

The level term insurance policy is the most common type of term life policy out there as the coverage and premiums remain the same for the entire term of the policy.

Yearly Renewable Term Policy

A yearly renewable term insurance policy, or YRT, is a type of term life insurance policy that does not have any specific term (or expiration date).

The policyholder has the ability to renew this type of insurance every year without having to present proof of insurability.

However, upon every renewal, the premiums charged by the insurance company will change and increase over time as the policyholder gets older.

Decreasing Term Policy 

A decreasing term insurance policy is a type of term life insurance policy where the coverage is reduced every year based on an established schedule.

Although the coverage is decreased with time, the premiums will remain the same for the entire duration of the policy.

In many cases, this type of insurance product is sold to those signing up for a mortgage allowing them to cover the value of their mortgage that is decreasing with time.

Return of Premium Policy

If you are ready to pay 2 to 4 times more for your term life insurance premiums, you may want to get the option of a return of premium which is an option allowing you to get a portion of your premiums paid back to you at the end of the term.

Guaranteed Issue Policy

A guaranteed issue policy is an option that you can include in your policy where you will have the ability to renew your term life insurance without having to go through a medical exam or health-related records.

With a guaranteed issue policy, you have the ability to renew your policy based on simple health questions.

Convertible Term Policy

Another type of option that you can have with your term life insurance is the convertible term life policy giving you the ability to convert your policy to a whole life policy without having to go through a medical exam.

Most insurance companies offer this option to policyholders allowing them to change their term life coverage to whole life coverage.

In some cases, you have the convertibility option within the first five years of the term life policy and if you want to have the option for the entire term of the policy, you may get an extended conversion rider.

What Is An Example of Term Life Insurance

Let’s look at an example of a term life insurance to better illustrate the concept.

Imagine that Mary is married, twenty-five years old and has recently given birth to a beautiful little girl.

She wants to protect her daughter and her family in the event of her unexpected death and so she considers getting term life insurance which is a more inexpensive life insurance option.

After looking around, she is given a quote for a 10 year term, 20 year term, and a 30 year term life insurance giving her a $250,000 coverage.

Since the 10 year term life insurance premium was the lowest per month ($40), she opts for that one.

The reason why she is able to get a low insurance quote is that she is young, has no prior medical conditions, and the policy coverage is not relatively high.

Now, if Mary dies within the term of the policy (prior to her reaching the age of 35), her term life policy will make a payout of $250,000 to her beneficiary.

With the payout, her beneficiary can cover costs such as healthcare costs, funeral costs, mortgage, or other types of debt in Mary’s name upon her death.

On the other hand, if Mary’s policy expires, Mary can choose to take another term life insurance policy of 10, 20, or 30 years at that time.

However, the premiums that she’ll need to pay will be assessed based on her medical condition at the age of 35.

Frequently Asked Questions

What Is The Value of A Term Life Insurance

Term life insurance’s main value is the possibility that death benefits may be paid out to your beneficiaries during the term of the policy in the event of death.

Aside from the possibility of the payout of the policy’s face value, you do not have any other value such as a savings component found in whole life insurance.

Who Should Buy Term Life Insurance

The fact is that term life insurance is not something that will be suitable for everyone.

However, there are certain instances where a person can consider a term life insurance to be beneficial, such as:

  • A person responsible for a home loan looking to have protection for the life of the mortgage should they pass away 
  • A person who wants to have some life insurance protection but cannot afford a high premium to purchase a whole life insurance 
  • A person looking to provide his or her beneficiaries with enough protection until they are able to become financially independent 

How Must Does Term Life Insurance Cost

Term life insurance is probably one of the least expensive life insurance policies that you may find.

The cost of term life policy premium is established based on various factors such as your age, your health condition, policy death benefits, additional options, and other risk factors.

Typically, the older you are or the more coverage you need, the more expensive your policy premiums will turn out to be.

The reason that is the case is that the insurance company is on the hook to make a payment in the event of death only for the duration of the policy term.

Since the insurance company is taking less risk (compared to permanent life policies), it is able to charge lower insurance premiums.

What Factors Should I Consider When Getting A Term Life Insurance 

How much coverage you may want to get with a term life insurance policy is really a personal question.

Since term life insurance policies are cheaper compared to whole life policies, it may be more feasible to get more coverage at a reasonable price.

However, just because you can afford to get more coverage does not mean that you should get the maximum coverage possible.

In many cases, people tend to evaluate their needs based on the nature of protection they are looking for, such as:

  • For how long do you need to have coverage
  • How much debt are you looking to cover 
  • How much can you afford to pay in premiums
  • How much risk are you willing to take by yourself
  • How many beneficiaries do you want to cover
  • What’s the financial impact on your beneficiaries if you die 

As such, it may be worth looking at your beneficiaries’ overall financial expense (should you die) and assessing how much coverage will make sense to protect them.

What Is The Difference Between Term Life And Whole Life Insurance Policies

The main difference between term life insurance and whole life insurance is that the first policy covers you for a fixed period of time (ranging from 10 years to 30 years) whereas the other covers you for your whole life.

Those who choose term life insurance are able to get insurance coverage at a lower cost as the insurance company is only liable to make a payout should the insured die during the term of the policy.

On the other hand, whole life insurance is more expensive as the insurance company is on the hook for the entire life of the insured.

Another key difference between term life and whole life is that you do not have any savings component with term life policies whereas you have one with your whole life.

Do You Get Your Money Back At The Expiration of A Term Life Policy

Unfortunately, you do not get your money back upon the expiration of your term life insurance policy.

One of the main attractive features of term life insurance is that you have a lower premium to pay compared to whole life insurance products (that could be as much as ten times less expensive).

On the other hand, you do not have any savings component associated with your term life policy.

As such, you do not get any money back at the end of the term life insurance.

According to the National Association of Insurance Commissioners (NAIC), there are some term policies that may provide you with a return of premium at the end of their term but you should be ready to pay more premiums for that option.

What Options Can You Take With Term Life Insurance

Every insurance company will offer you different options (or riders) at different costs.

The most common types of life insurance riders are:

  • Accelerated benefit 
  • Accidental death benefit
  • Guaranteed insurability 

The accelerated benefit allows you to get a portion of your death benefits if the insured is diagnosed with a terminal illness for instance.

The accidental death benefit provides additional benefits if the death of the insured was due to an accident.

Guaranteed insurability is a type of rider that allows you to renew your coverage without having to prove your insurability.

How Do I Determine The Amount of Death Benefits I Need

Getting the right amount of coverage is an important decision that you’ll need to make as it will most certainly impact your budget during your lifetime and your family’s finances after your passing.

There are different methods that financial representatives use to calculate the right level of coverage, such as:

  • Salary multiplier
  • Salary multiplier plus major expenses
  • DIME formula 
  • Human Life Value 

The salary multiplier is a simple method where you take 10 times the gross value of your salary to determine the coverage you need.

However, this method does not take into account your family’s actual expenses.

The second method is to take 10 times your salary and add major expenses like your children’s college or university tuition.

The DIME formula considers your Debt, Income, Mortgage, and Education.

The Human Life Value considers your future income potential where the younger you are the more potential you have.

If you are between the age of 18 to 40, you’ll multiply your salary by 30 times and decrease the multiplier as you get older to 0.5 times if you are over 71 years of age.

What Is A Term Life Insurance Policy Takeaways 

So there you have it folks!

What is a term life insurance?

A term life insurance is a type of life insurance policy where you have insurance coverage paying out death benefits in the event of death for a specific period of time from the start of the policy.

You can find term life policies offering a 10-year term, 20-year term, or 30-year term.

If the insured dies during the term of the policy, the beneficiaries will be entitled to receive the death benefits.

If the policy expires without an event of death, then there will be no payouts.

I hope I was able to answer your question about what is the meaning of term life insurance, what are its main features, and how it works.

Good luck with your insurance decision-making!

Let’s look at a summary of our findings.

What Is Term Life Insurance (Meaning Overview)

  • Term life insurance policies offer coverage for a specific period of time as of the start date of your policy
  • Typically, coverages can be obtained for 10 years, 20 years, or up to 30 years
  • What’s attractive with term life policies is that they offer interesting death benefits at an affordable premium compared to other types of policies like permanent life insurance 
  • Unlike whole life policies, in general, you do not get any money back from term life policies and do not have any cashback
  • There are different types of term life coverages and so it’s important to consider your needs before selecting what’s right for you 
Basic term life insurance 
Best term insurance policy 
Convertible insurance policy
Decreasing term policy 
Dependent term life insurance
Guaranteed life insurance 
Level term policy
Return of premium life insurance 
Supplemental term life insurance 
Term life insurance vs convertible term life insurance
Term life insurance vs permanent life insurance 
Universal life insurance policy 
Variable universal life insurance policy 
Yearly renewable term policy
Accelerated benefits
Accidental death benefit
Average life insurance rate 
Best life insurance companies 
Death benefits 
Group term life insurance
Guaranteed insurability 
How to buy life insurance
How to get affordable health insurance
Incidents of ownership 
Life insurance costs 
Nonforfeiture clause 
What is gap insurance
What is life insurance
What is term life insurance 
What is whole life insurance


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