Life Insurance Basics
Term life insurance is one of the most popular types of life insurance available because it's straightforward, affordable, and lasts as long as a proposed insured (PI) needs it -- for most people, that's between 10 and 40 years. Premiums can be paid monthly or annually, and in exchange for relatively low rates, the PI's beneficiaries get a tax-free lump sum of money after the PI dies.
What is term life insurance?
Term life insurance guarantees financial protection for a PI’s family over a specific period — the term — before expiring. If the PI dies before the term ends, their beneficiary receives a life insurance death benefit that can be used to cover funeral costs, bills, or any other expenses. Because of its low pricing and simplicity, a term policy is the best kind of life insurance for most people.
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Features
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Policy overview
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| Policy duration | 10 to 40 years |
| Average cost | $21 to $152/month |
| Guaranteed death benefit? | Yes |
| Cash value? | No |
Methodology: Average cost range is based on internal actuarial rate tables for 10 life insurance carriers that offer policies through the Policygenius marketplace (AIG, Banner Life, Brighthouse, Lincoln Financial, Mutual of Omaha, Pacific Life, Protective, Prudential, SBLI and Transamerica). Prices represent the average monthly life insurance premium for male and female non-smokers in a Preferred health classification, buying a 20-year, $500,000 term life policy. Individual rates may vary, depending on age, gender, state, health profile, and other eligibility criteria.
How does term life insurance work?
Unlike permanent life insurance, which lasts for the rest of a PI’s life and comes with a cash value, term life is easy to manage and cost-effective. Terms usually last 10 to 40 years, after which the PI can renew their policy, convert it to permanent coverage, or let the policy expire.
Premiums are based on several factors — including a PI’s age, gender, health, and policy choice — and can be paid on a monthly or annual basis.
The PI can choose their term length and coverage amount so they don’t pay for more financial protection than they need. Unless the PI has a unique financial situation or will be providing lifelong financial support, term life coverage makes more sense for the average person
Types of term life insurance
While traditional term life is the most straightforward type of life insurance and the right option for most people, there are some variations of term life that could fit a specific PI’s needs. For example, younger and healthier applicants who want to skip the medical exam can apply for a no-med term policy to get covered faster. Is the PI in question working on improving their health? A yearly renewable term policy may be worth considering.
No-medical-exam
A term life policy with no medical exam requirement makes getting a policy fast and contactless. Instead of a medical evaluation, the insurance company makes an application decision based on a PI’s existing health records and a phone interview. A PI can get competitively priced coverage in as little as 24 hours. People with few health concerns are more likely to qualify.
Annual renewable
An annually renewable policy (also known as yearly renewable) has a term that lasts just one year. The PI needs to renew each year to continue their coverage, with rate changes at each renewal. Premiums usually start lower than for a policy with a longer term, but eventually become much higher the longer a PI renews.
This is a useful option if a PI only needs coverage for a brief period or if they’re making health and lifestyle changes that could earn them lower rates on a policy with a longer term in a few years. For example, if a PI is quitting smoking or working on lowering their cholesterol, they might benefit from having an annual renewable policy while they build a track record of treatment and improvement.
Decreasing term
In a decreasing term policy, a PI’s premiums stay the same but their death benefit goes down the longer they have the policy (usually each year). Decreasing term policies typically don’t have medical requirements for approval, but that means they’re usually more expensive than a traditional term policy. A traditional policy will also provide more coverage for the price.
Questions or want to learn more?
Other types of life insurance
Group life insurance
This is a type of annual renewable insurance that’s offered through an organization a PI belongs to — for most people, it’s their employer. Premiums are covered mostly or entirely by the organization and there are no health restrictions to get covered. Group policies are limited in that they usually don’t offer enough coverage and a PI can rarely keep them if you leave a job.
Mortgage protection insurance (MPI)
MPI is a type of decreasing term policy where the coverage is tied to a PI’s mortgage loan. The term lasts the length of a PI’s loan and the death benefit decreases as the PI pays off their mortgage. The beneficiary of MPI is the PI’s lender, not their family.
Return of premium (ROP)
Return of premium is sometimes sold as a standalone policy and more often seen as a rider a PI can add to their coverage for an extra cost. ROP coverage refunds previous premium payments to the PI if they outlive their term coverage. However, the policies are pricey.
Increasing term
An increasing term policy has a death benefit that goes up at set intervals over the course of a PI’s coverage. For example, a PI’s benefit might increase by 5% every year. Premiums can fluctuate, depending on the insurer. Rates are higher for this type of policy.