What is Term Life Insurance?

Term life insurance is a straightforward and budget-friendly way to protect your family financially. You select a coverage period, like 10, 20, or 30 years. If you pass away during this time, the policy pays a lump sum, known as a death benefit, to your beneficiaries. Once the term is up, you can renew the policy, switch it to permanent coverage, or let it end. Term life insurance is often more affordable than other types because it covers you for a set time and doesn't have a cash value component.

How Does It Work?

When you purchase a term life insurance policy, the insurance company calculates your premium based on factors such as the policy's value (the payout amount), your age, gender, and health. The company also considers its business expenses, investment earnings, and mortality rates for each age. Sometimes, a medical exam is necessary. The insurer may also ask about your driving record, medications, smoking status, occupation, hobbies, family history, and other details.

If you pass away during the policy term, the insurer pays the policy's face value to your beneficiaries. This benefit, which is typically not taxable, can be used by beneficiaries to cover healthcare and funeral costs, consumer debt, mortgage debt, and other expenses. However, beneficiaries are not obligated to use the insurance proceeds to settle your debts.

If the policy ends before your death or you outlive the term, there is no payout. You might be able to renew a term policy at its expiration, but the premiums will be recalculated based on your age at that time.

Key Features

Term life insurance guarantees payment of a stated death benefit to the insured's beneficiaries if the insured person dies during the specified term.

These policies have no value other than the guaranteed death benefit and don’t feature a savings component, as is found in permanent life insurance products.

Term life premiums are based on a person’s age, health, and life expectancy.

You can purchase term life policies that last 10, 15, 20 years, or more, and can usually renew them for an additional term.

Term Life Vs Whole Life

When comparing term life insurance to permanent insurance like whole life or universal life, the key differences lie in the policy's duration, cash value accumulation, and cost. Term life insurance is generally more affordable because it covers a specific period and does not build cash value. Here are some points to consider:

Cost of Premiums

Term life insurance typically has lower premiums compared to permanent insurance because it provides coverage for a set time and does not accumulate cash value.

Availability of Coverage

Term life insurance is often easier to qualify for and more readily available than permanent insurance, which may require a medical exam and have stricter eligibility criteria.

Investment Value

Unlike permanent insurance, term life insurance does not have an investment or cash value component. The premiums you pay for term life insurance only provide a death benefit.


Term life insurance policies are renewable at the end of the term, but the premiums will increase based on your age at renewal. Permanent insurance is designed to last a lifetime and does not require renewal.

Types of Coverage

Term life insurance provides coverage for a specific period, such as 10, 20, or 30 years, while permanent insurance lasts a lifetime as long as premiums are paid. Permanent insurance also includes a cash value component that can be accessed during your lifetime.

Bottom Line

Term life insurance offers an affordable way to provide financial protection for your loved ones for a specific period, such as 10, 20, or 30 years. It's a practical choice for those seeking straightforward coverage without the complexities of a cash value component. If you're looking for a budget-friendly option that meets your temporary needs, term life insurance is a smart choice.