Term Life Insurance

Term life insurance is an affordable option to provide a death benefit to your family if you die within a specific period of time — typically one to 30 years. Term life policies allow you to choose the term and convert to a permanent life policy while providing flexible options for premium payments.

Terry Turner, Financial writer for Annuity.org
  • Written By
    Terry Turner

    Terry Turner

    Senior Financial Writer and Financial Wellness Facilitator

    Terry Turner is a senior financial writer for Annuity.org. He holds a financial wellness facilitator certificate from the Financial Wellness Foundation and the National Wellness Institute, and he is an active member of the Association for Financial Counseling & Planning Education (AFCPE®).

    Read More
  • Edited By
    Savannah Hanson
    Savannah Hanson, financial editor for Annuity.org

    Savannah Hanson

    Senior Financial Editor

    Savannah Hanson is an accomplished writer, editor and content marketer. She joined Annuity.org as a financial editor in 2021 and uses her passion for educating readers on complex topics to guide visitors toward the path of financial literacy.

    Read More
  • Financially Reviewed By
    Stephen Kates, CFP®
    Stephen Kates, CFP® Headshot

    Stephen Kates, CFP®

    Expert Contributor

    Stephen Kates is a Certified Financial Planner™ and personal finance expert specializing in financial planning and education. Stephen has expertise in wealth management, personal finance, investing and retirement planning.

    Read More
  • Updated: November 30, 2022
  • 7 min read time
  • This page features 7 Cited Research Articles
Fact Checked
Fact Checked

Annuity.org partners with outside experts to ensure we are providing accurate financial content.

These reviewers are industry leaders and professional writers who regularly contribute to reputable publications such as the Wall Street Journal and The New York Times.

Our expert reviewers review our articles and recommend changes to ensure we are upholding our high standards for accuracy and professionalism.

Our expert reviewers hold advanced degrees and certifications and have years of experience with personal finances, retirement planning and investments.

Cite Us
How to Cite Annuity.org's Article

APA Turner, T. (2022, November 30). Term Life Insurance. Annuity.org. Retrieved December 5, 2022, from https://www.annuity.org/life-insurance/types/term/

MLA Turner, Terry. "Term Life Insurance." Annuity.org, 30 Nov 2022, https://www.annuity.org/life-insurance/types/term/.

Chicago Turner, Terry. "Term Life Insurance." Annuity.org. Last modified November 30, 2022. https://www.annuity.org/life-insurance/types/term/.

Key Takeaways
  • Term life insurance provides the most coverage with the most affordable premiums.
  • Coverage is limited to the specific number of years a term life policy is in effect and renewing coverage may be more expensive or difficult to acquire depending on your age.
  • Term life insurance is less complex than permanent life, but does not build cash value over time.

What Is Term Life Insurance?

Term life insurance provides coverage for a fixed rate of payments over a specific number of years or other period of time. This time frame is the term. If you die within this term, the insurance company pays a death benefit to whomever you name as your beneficiaries.

It does not provide lifetime coverage, but it is a leading choice to cover a young family’s financial obligations if one or both income earners die. Term life insurance can be used to cover mortgage and other debt, college and other education costs or lost earnings.

Term life is one of the two main types of life insurance — the other being permanent life insurance, which does cover you for your lifetime. But term life insurance is typically much less expensive than permanent life insurance.

Typically, the younger you are when you buy a term life policy, the lower the premium payments will be throughout the term of the policy.

Stephen Kates, CFP® Headshot
Term insurance is the most basic and affordable life insurance available to consumers. It should be a foundation of your protection strategy during periods of time when you have spouses, dependents or business partners depending on you during a defined period.

Types of Term Life Insurance

There are several types of term life insurance, but most policies tend to be level term policies, according to the Insurance Information Institute.

Types of Term Life Insurance Policies
Level Term
The name level term applies to the death benefit paid out during the term of the insurance policy. With a level policy, the death benefit remains the same — or level — regardless of when you die during the policy’s term.
Decreasing Term
Again, the name applies to the death benefit. With a decreasing term policy, the amount of the death benefit decreases over the course of the term. The longer you live, the less of a benefit.
Convertible Term Policies
Convertible policies allow you to convert your term life policy into a permanent life policy — either whole life or universal life insurance. This allows you to shift from term to lifetime coverage without having to provide medical or other evidence that you are insurable.
Renewable Term
These are policies meant to be renewed. The premiums remain level, but increase with each renewal. Yearly or five-year renewable policies have become less popular as most term life policies are now 20-year term policies.
Return of Premium
With term life insurance, once the term expires, you get no refund of the money you paid into the policy. This feature allows you a return on the money you spent over the years. Return of premium policies tend to be more expensive than traditional term life insurance policies.
Source: Insurance Information Institute

How Does Term Life Insurance Work?

Term life insurance is the most basic type of life insurance — and typically meets the needs of most people looking for life insurance.

You pay a fixed premium over a specified period of time — usually between 10 and 30 years. If you die during that term, the insurance company pays a death benefit to whomever you name as a beneficiary or beneficiaries.

The amount of the death benefit is specified in the policy.

If you outlive the term of the policy, your coverage stops, and you typically don’t get any of your premiums back. You paid for a specific period of coverage, so the idea is that you received fair value. The exception is if you had a return of premium policy.

On the other hand, if you quit paying your premiums before the term is up, your coverage stops and you cannot reclaim the premiums you’ve paid into the policy.

Pros and Cons of Term Life Insurance

Term life insurance is the most common type of life insurance and fits the needs of most people. But it’s not the best choice for everyone.

You should compare the pros and cons of term life insurance before making a decision on what kind of life insurance is best for your needs and goals.

Advantages of Term Life Insurance

Cost and flexibility are among the top advantages term life insurance has to offer. But there are other qualities you should also consider.

Top Advantages of Term Life Insurance
Cost
Term life insurance is the least expensive type of life insurance. The younger you are when you purchase a term life policy, the lower your premiums.
Convertibility
If you buy a term life policy and decide later that permanent life insurance is a better option, you can typically convert your term life policy to permanent life insurance.
Cancel Anytime
If you no longer want or need life insurance coverage, you can cancel a term life policy at any time — without having to pay a penalty.
Easy To Understand
Term life policies are fairly simple compared to permanent life insurance. Permanent life policies include complex features dependent on savings, interest and market fluctuations. Term life is straightforward — detailing a death benefit, a specific term and premiums.
Flexible Policy and Payments
Term life insurance allows you to more easily decide the frequency at which you make premium payments — monthly, quarterly, semi-annually or annually. You also have a wide range of terms for the policy — typically from one to 30 years.
More Coverage
Because of the way term life insurance is structured, you can get far more coverage for less cost than similar coverage through a permanent life policy. The death benefit from term life coverage can be above $10 million.
Tax-Free Death Benefit
If you die, your beneficiaries receive the policy’s death benefit in a single lump sum. But they do not have to pay income, estate or other taxes on that money — allowing them to use the full amount as they see fit.

Disadvantages of Term Life Insurance

Term life insurance is designed to pay off debt, replace income and pay expenses for your survivors. But it does have some drawbacks to consider.

Top Disadvantages of Term Life Insurance
Temporary Coverage
Your coverage is limited to the term of your policy. If you have a special-needs dependent or long-term debt likely to outlive you, you may want to consider permanent life insurance.
No Cash Value
Term life insurance typically only provides a death benefit. You don’t build up cash value in a term life policy like you would in a permanent life insurance policy. If you’re still alive when your term ends, you don’t receive any of the money you put into premiums. (A return of premium rider will repay if you outlive the policy, however.)
Upper Age Limit
As you age, it becomes increasingly difficult to purchase a term life policy. The age limit for buying term life insurance varies by company, but by the time you hit your 60s, you may be limited to a shorter, 10- to 20-year, term policy.
Uncertainty
When your policy’s term ends, your coverage stops. If you still need life insurance coverage at this point, coverage may be much more expensive — or you may no longer be insurable.

How are Term Life and Permanent Life Insurance Different?

There are several differences between term and permanent life insurance — the biggest one is that term life covers you for only a specific number of years while permanent life insurance covers you for your entire life.

Each of these types of life insurance serves a different purpose. Term life provides a financial safety net for your beneficiaries if you die. Permanent life insurance — whole life and universal life insurance — provides the same safety net but also includes a savings component allowing you to tap into your life insurance policy while you’re still alive.

These purposes allow lower cost and less complex policies for term life policies, while permanent life insurance can be used as a savings and investment tool.

Which One Is Right for You?

To determine which type of life insurance is right for you, it’s important to consider the reason you’re buying life insurance.

Term life insurance may be the better choice if you only need life insurance for a specific period of time and need a large amount of life insurance on a limited budget.

Permanent life insurance may be the better choice if you need a death benefit for your beneficiaries no matter how long you live and if you want to accumulate cash savings you can borrow from your policy while you’re still alive.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: November 30, 2022

7 Cited Research Articles

Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

  1. National Association of Insurance Commissioners. (2022, June 23). Life Insurance. Retrieved from https://content.naic.org/cipr-topics/life-insurance
  2. Texas Department of Insurance. (2022, June 14). Life Insurance Guide. Retrieved from https://www.tdi.texas.gov/pubs/consumer/cb018.html
  3. National Association of Insurance Commissioners. (2021, September 23). What Type of Life Insurance Is Right for You? Retrieved from https://content.naic.org/article/consumer-insight-what-type-life-insurance-right-you
  4. Insurance Information Institute. (n.d.). How to Choose the Right Type of Life Insurance. Retrieved from https://www.iii.org/article/how-choose-right-type-life-insurance
  5. Insurance Information Institute. (n.d.). What Are the Principal Types of Life Insurance? Retrieved from https://www.iii.org/article/what-are-principal-types-life-insurance
  6. Insurance Information Institute. (n.d.). What Are the Different Types of Term Life Insurance Policies? Retrieved from https://www.iii.org/article/what-are-different-types-term-life-insurance-policies
  7. Minnesota Commerce Department. (n.d.). Term vs. Permanent Life Insurance. Retrieved from https://mn.gov/commerce/consumers/your-insurance/life-annuities/term-vs-permanent.jsp