What Is Term Insurance? A Complete Guide To The Basics

If you're interested in buying term insurance (also known as term life insurance) but not sure what it is or how it works, read more about the benefits and coverage of a term life policy.

Term insurance is a pure protection life insurance policy. It provides coverage for a defined period in exchange for a specified premium amount. In case of an unfortunate event during this time frame, the insurer offers a guaranteed payout. It compensates your nominee for the loss of your income.

Affordability is a characteristic feature of term plans. Such plans do not include any investment component. The entire premium covers the mortality risk. Hence, term insurance provides sizable coverage at pocket-friendly rates. Thus, term insurance can protect your dependents’ financial necessities after an eventuality regardless of your budget.

Term life insurance is a top choice for people who want to cover everyday financial obligations when raising a family. With term life insurance in place, there’s a safety net that can provide funds for paying a mortgage, sending kids through college, or other vital concerns if you are no longer around.

A term life insurance policy is the simplest, purest form of life insurance. As the name suggests, term insurance plans are life insurance plans purchased for a specified time. You pay a premium for some time, typically between 10 and 30 years. If you die during that time, a cash benefit is paid to your family or anyone else you name as your beneficiary.

It is not easy to shop for insurance policies because there are many insurance products in the market, and a layperson can get confused. Therefore, it is vital to do your research, gain as much information as possible, and then decide about term insurance. Here we did our research for you to know every detail about term life insurance.

What is term insurance and how does it work?

Term insurance, also known as term life insurance, is a life insurance policy with a specified end date, 20 years from the start date. The death benefit will only be paid out if the policyholder dies during the chosen term. The death benefit is the amount of money paid to the beneficiary when the policyholder passes away.  If you are buying term life insurance, you have two major decisions: the length of the term and the coverage amount.

While consumers often purchase term coverage assuming that any dependents will be grown and financially independent by the time it expires, that is not always the case. Generally, when term life insurance expires, the policy simply expires, and no action needs to be taken by the policyholder. The insurance carrier notices that the policy is no longer in effect, the policyholder stops paying the premiums, and there is no longer any potential death benefit. If the policyholder had a return-of-premium policy, a check would be sent for the amount paid into the policy throughout its term.

Most term policies have an underwriting process in which the insurer evaluates your age and health status. You will have to undergo a medical exam. The insurer will also ask about your lifestyle and other factors to determine your premium cost.

Guaranteed and simplified issued policies typically do not require a medical exam and only ask a few simple health questions. Premiums may be higher because the insurance company must assume that you are a risky prospect with health problems. If you have health issues but can manage them, considering a conventional term policy with a medical exam will usually be worth your while.

Pros and cons of term insurance

Term insurance has its pros and cons like any other insurance product. Let’s find out what those are.

Pros of term insurance

Following are the pros of term insurance plans.

Easy to understand

Life insurance can be complicated, making some hesitant to buy coverage. Permanent life insurance combines interest, market fluctuations, and savings with life insurance proceeds. Term life is easy to understand because it simply provides a death benefit when you die within the policy term, as long as premiums are paid.


About half of Americans overestimate how much term life costs, thinking it costs over three times what it costs. Term life insurance is the best option for most because it offers extensive coverage at a budget-friendly rate.

More coverage available

After determining how much life insurance you need, you may be surprised to see the final figure is $1 million or more. This sizable figure can cause people to panic, worrying they can’t possibly afford the coverage they need. You can buy $10 million or more in life insurance with term life, getting you the coverage you need in one policy at an affordable price.

Tax-free death benefit

If you die during your policy term, your beneficiary or beneficiaries will receive a lump sum from the life insurance company. Luckily, term death benefit proceeds are tax-free, so your beneficiary can keep the total amount to use as they wish.

Flexible payment and policy options

Term insurance offers several payment and policy options. You can pay your premiums monthly, quarterly, semi-annually, or annually. Most life insurers charge a processing fee if you don’t pay once per year, so you may be able to save with an annual payment. You can also choose how long you need coverage, whether one year or 30. The most common terms are in increments of five years, from five to 30 years in coverage.

No penalty for canceling

If you decide to cancel your term policy while active, you can without incurring any fees or penalties.

Cons of term insurance

Following are the cons of a term insurance plan.

Temporary coverage

Term life only offers temporary coverage, so it’s not always the best option for everyone. Term life may not be the best choice if you have permanent life insurance needs, like funeral expenses or caring for a special needs child into adulthood.

No cash value

Term life doesn’t build cash value, meaning it doesn’t include a savings account to borrow from or withdraw against. If you cancel a term policy, you don’t get any money back unless you get a policy that offers a return of premium features, which comes with higher costs. This differs from permanent life insurance, which provides a surrender value based on the cash savings account if you cancel the policy.

Upper age limit

Term life has a lower upper age cap than permanent life insurance. Though the maximum age limit varies by company and term length, most people can apply up to age 50 for all term lengths. Once you reach 60 or older, you may be limited to buying a 10- or 20-year term, without the option for a 30-year term.

Types of term insurance

There are four main term life insurance options: level term, decreasing term, renewable term, and convertible term insurance. Let’s have a brief overview of these for your guidance.

Level term insurance

With a level term insurance policy, both the monthly premiums and the death benefit remain the same for the entirety of the term. There is also level premium insurance, which maintains duplicate premium payments but increases coverage. For example, a 40-year-old male with no conditions can pay around $18 a month for a 15-year level term policy worth $250,000.

Annual renewable term insurance

An annual renewable term policy’s premiums increase each year you renew it. When you choose this policy, you’re guaranteed to keep coverage and don’t need to reapply. It may be suitable for people who want to fill a short gap in life insurance. However, a short level term life policy may be a better choice.

Decreasing term insurance

Decreasing term policies are usually cheaper to buy upfront than level term life insurance policies. However, even though the premiums stay the same, the death benefit decreases yearly. This policy is typically taken out by people with financial commitments that reduce over time, like a mortgage. If you were to die at the start of the term, your dependents would get a higher payout than at the end of the term, at which point the policy payout would be down to zero.

Convertible term

This is an option on many term insurance policies, and some include it as a standard feature. In this type of term policy, you can convert it into a universal or whole life insurance policy when the term expires. Premiums for this type of policy are higher than for level term life insurance.

Convertible term coverage can be a good choice if you want permanent coverage but can not currently afford it. Conversion may only be an option during a specific time window once the policy is issued, such as the first 10 years. If your policy has this feature, or you are interested in purchasing a policy with it, make sure you understand the terms and conditions under which you can convert.

Term insurance calculator

A term insurance premium calculator is easy to use and helpful when you plan to buy a term insurance policy. These calculators also help in calculating the sum assured amount that an individual needs for securing the financial position of the family. Term insurance calculator is an online tool that helps you calculate the coverage amount necessary as per your requirements.

It can be very helpful when you plan to purchase a term insurance plan. The calculator then tells you how much coverage you require to adequately protect your family. It also recommends the best policies offered by different insurance providers.

How much is term insurance?

The cost of term life insurance varies by company and is based on your age, coverage amount, and term length. While some companies don’t require a medical exam, you may be able to get a better rate if you’re healthy and undergo one. Your health, lifestyle, hobbies, and occupation are used to determine your risk class, which then determines your cost of life insurance. We created a table below to know how much you can pay for a 10 or 20-year term policy at different coverage levels.

Term life insurance average monthly premiums: 10-year policy

Age $250k/10-Year $500k/10-Year $1M/10-Year
30-year-old $14.75 $18.44 $32.05
40-year-old $18.72 $24.80 $45.21
50-year-old $36.67 $55.28 $99.51
60-year-old $81.52 $137.14 $258.18

Term life insurance average monthly premiums: 20-year policy

Age $250k/20-Year $500k/20-Year $1M/20-Year
3-0-year-old $18.09 $24.82 $46.65
40-year-old $25.50 $36.91 $72.67
50-year-old $57.31 $92.27 $175.62
60-year-old $145.89 $250.93 $486.80

Best term insurance plan

If you pass away, purchasing a term life insurance policy can protect your family. Term life insurance policies remain active for a set period of time, usually between 10 and 30 years, and are typically much cheaper than many insurance plans more importantly permanent life insurance policies. If you are looking for the best term life insurance policy for your needs that fits best to your budget, you should start by researching the companies we presented ahead in this article.

The best term life insurance companies depend on an individual’s needs and preferences. Some carriers focus exclusively on members of the military community, while others focus on coverage for people with certain health conditions, such as diabetes or respiratory illnesses. Here we’ve chosen five of the most popular and well-established life insurance companies that offer term policies.

Mutual of Omaha

Mutual of Omaha has a wide array of riders that helps policyholders to tailor their coverage to their needs. It provides a plethora of additional riders that you can add to term life policies. It should be noted that not every rider can be used with every type of policy. To verify how much coverage you need and which riders can be added to your policy, you may consider consulting with an agent. 2021 J.D Power Rank has given mutual of Ohama on 795 score. It has an A+ ranking at AM Best and an AA- on S&P. Hence, you can safely choose this company for a term insurance plan.

Northwestern mutual

It offers a wide array of informational resources and policy management tools online. According to the Insurance Information Institute, Northwestern Mutual is the second-largest life insurer in the U.S. by direct premiums written and insuring consumers for more than 150 years. This is reflected in the company’s high J.D. Power customer satisfaction rankings, which is 807; and represents its deep understanding of families’ financial protection needs.

Its term policies allow you to select your coverage period based on a set number of years or a specific age, depending on which option is most suitable. These plans are also convertible to whole life insurance should the need arise, meaning your policy can adjust as your needs evolve. Northwestern Mutual’s A++ (Superior) financial strength rating from AM Best is the highest level available.

Principal financial

This company allows policyholders to convert their term policy to whole life insurance, creating maximum flexibility for the policyholder. Principal Financial, the 23rd-largest U.S. life insurer, offers term life insurance policies with an option of conversion during the term to a whole life policy.

Policyholders can choose term lengths that fit their current circumstances, whether they only need coverage for a single year or prefer more extended 10-, 15-, 20- or 30-year periods. If a policyholder decides to convert the policy, he may receive permanent coverage without the added need of proving his health.

Principal Financial also offers a complete range of cash value policies, including whole life, universal life, and variable universal life. Principal financial scored 776 in 2021 J.D Power Rank, AM rated it A+, and S&P rated AA-.

State farm

State Farm is the seventh-largest U.S. life insurer, providing several products for term insurance, but its return-of-premium policy is a particularly nice offering. With it, policyholders can choose between a 20- or 30-year payment term and receive their premiums back if they outlive the term. Suppose you decide you want more extended coverage. In that case, you can renew the return-of-premium policy annually until the age of 95, covering most insureds for their entire lives.

The return-of-premium option comes at an additional cost and builds cash value. Cash value is generally not included in term life insurance policies but maybe valuable for emergencies where money needs to be borrowed against your account. Because State Farm offers a full array of insurance products, including auto and home, its customers may have the opportunity to earn premium discounts by bundling life insurance with another policy. Start Farm scored 822 in 2021 J.D Power Rank, AM rated it A, and S&P rated AA.


USAA provides insurance to only military personnel, veterans, and their immediate family but provides life insurance policies worthy of consideration for those who qualify for coverage. Most standard life insurance policies do not pay a death benefit if the insured dies from an act of war. USAA is an exception to this practice, providing specific coverage to service members while they are deployed. You can purchase this policy in addition to group term life insurance, which is accessible to all the members of the military through the government.

USAA’s policies can also pay out an additional $100,000 of benefits for service members up to age 35 who marry or have children. In fact, all of the service member’s children can be added to the policy for less than an additional $8 per month. Moreover, USAA caters to consumers who like to shop for life insurance virtually and recently introduced a term product that is only available online and does not require a medical exam for coverage. USAA rated A++ on AM, and AA+ on S&P.

How to find the best term life insurance company for you?

There are several factors to consider when shopping for a quality term life insurance policy. Since your life insurance will ultimately be responsible for providing the coverage you want for your family, these considerations may be beneficial to keep in mind when determining which provider is right for you. In addition to policy types, you could consider:

The financial strength

A life insurance company’s financial strength score reflects its past ability to pay out claims and could help you decide if a company is financially sound. Third-party agencies such as AM Best and S&P publish financial strength scores for each major provider.

Getting multiple quotes

Getting quotes for different types and levels of coverage can help you get an idea of how much you’ll pay for your life insurance. However, keep in mind that quotes for the same person and policy type likely won’t vary as much from company to company as auto insurance or home insurance quotes do.

Assessing your situation

Term life insurance remains active for only a set number of years. To decide whether term life insurance is right for you, it may be helpful to ask what you want coverage for. Do you simply want coverage while your children are young, or would you prefer lifelong coverage?

Should you buy term life insurance?

Term life insurance offers temporary coverage for temporary financial needs, while permanent life insurance covers lifetime needs. Every situation is unique, so it’s best to take time to weigh your options and consider what’s best for you. Please see below the table that depicts the information of individuals who can benefit most from this coverage.

Buyer Profile How they benefit
Young, Newlywed Couples Young couples may think they do not need life insurance, but this is the best time to buy term life coverage. The younger and healthier you are, the better your rates will be. You can use term life insurance’s monetary benefits to replace income, pay off outstanding debts like a mortgage, car, and student loans, and cover future financial needs like childcare and education costs.
Business Owners Business owners can use term life insurance proceeds to pay off debts, expenses, and outstanding taxes. The details are typically outlined in a buy-sell agreement contract, which is especially important if ownership or shares in the company are to be transferred to another party. Owners with valuable employees can also take out term life insurance, often called key man insurance.
Sole Financial Providers Losing your only source of income can be detrimental to a family, which is why term life insurance can be vital in these situations. The remaining parent can use the death benefit as income replacement, allowing them to stay at home with their children instead of going to work right away. The proceeds can also be used to pay for everyday expenses and current and future childcare and education costs.
Individuals With Significant Debts People with significant debts can use term life insurance to pay off their debts upon death. The designated beneficiary will use the death benefit proceeds to pay off those debts like student loans or a mortgage rather than pay them out of pocket or forfeit the property. Profits can also be used to replace income or provide current and future financial support for remaining family members.
Stay-at-Home Parents Stay-at-home parents benefit their families, allowing the other parent to work and earn income. Buying term life insurance for the stay-at-home parent means the working parent can continue working or stay at home with the kids if they choose.

You can use this benefit for income replacement or pay for childcare and other expenses.


Term life insurance policies consist of a death benefit and a fixed policy term. The death benefit, also known as face amount or value, is the amount of money that goes to your beneficiary or beneficiaries if you pass away during the policy’s term. Policy terms usually range between 5 and 30 years, with the most popular option being 20-year terms. Some companies also offer one-year term policies, also called yearly-renewable term policies.

Moreover, there are four main term life insurance options: level term, decreasing term, renewable term, and convertible term insurance. If we talk about the term insurance policy coverage lasts for a specific period, you will pay accordingly. That makes term life an appropriate and affordable option for those who need coverage for the duration of their mortgage or need to purchase a large coverage amount.

Sandra Johnson

Sandra Johnson

Sandra Johnson was a few years out of school and took a job as a life insurance agent in California, selling coverage door-to-door for Prudential. The experience taught her about the technical components of insurance and its benefits for individuals and society, as well as the misunderstandings people often have about insurance. She has over ten years’ experience in the insurance industry, having worked as both a Broker and Underwriter, assisting clients across a broad range of industries. At Insurance Noon, Sarah diligently gathers all the required information and curates up pieces to provide meaningful insurance solutions. Her personal value proposition is to demonstrate a genuine interest in always adding value for clients.Her determined approach to guiding clients has turned her into a platinum adviser to multiple insurers.

Insurance Noon is the world's leading source of insurance related content on the web, focusing on industry news, buying guides, reviews, and much more.