Term life insurance is the most basic form of life insurance, providing temporary coverage at an affordable cost.Get a Quote at Ethos
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Term life insurance is a type of temporary, short-term life insurance that pays a death benefit to your beneficiaries should you pass away while the policy is in effect. A death benefit is a monetary sum that can provide a safety net to your family and loved ones in the form of some financial security upon your passing.
The most common term life insurance policy duration is 10 years. If the insured lives beyond the specified period in which the policy is active, the policy simply expires and the insured would need to renew or enroll in another life insurance policy.
Life insurance is a contract between the policyholder (the owner, or insured person) and an insurance company. The owner agrees to pay premiums for a set number of years — generally between 10 to 30 — with the understanding that should the owner pass away during this time period, the insurance company will pay out a death benefit to their designated beneficiaries after the claim is filed. Death benefit payouts are not counted as taxable income and can be spent on any expenses following the insured’s death, like funeral costs, education, paying off debt and more.
Before term insurance can be finalized, there is an application process the insured must complete. For an insurance company, this is the underwriting period during which your risks as a client are evaluated and then priced accordingly. This typically involves a medical exam and an evaluation of your lifestyle; insurers will want to know about your occupation, hobbies and more to analyze your mortality risk and set your premiums to what they deem appropriate. Smokers and those who participate in riskier activities — hobbies like scuba diving and occupations on oil rigs, for instance — will pay pricier rates.
During this process, the insured needs to make important decisions related to their term life insurance policy:
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Term life insurance is generally preferable over whole life insurance for those who are venturing into adulthood. If you’re at a stage in your life where you’re about to hit some milestones — like getting married, buying a house, starting a family — term life insurance would make more sense than a whole life policy.
There are a few reasons why term life insurance might be a good idea:
Once you’ve decided that a term life insurance plan is the best fit for you and your family, you’ll also need to decide on the type of policy. Each comes with different benefits (and costs) over the policy’s duration.
The terms and conditions of a term life insurance policy can be supplemented with riders. These increase your level of protection should unexpected issues or conditions arise.
Common riders, like the term conversion rider, are generally already included as part of a term life insurance policy. Other riders may be added for an additional cost:
Death benefits amounts can range from $20,000 well into the multi-millions. When you apply for life insurance, your income, assets and overall net worth are used to evaluate how much coverage you qualify for.
Many life insurance agents and experts recommend multiplying your yearly income by 10 to 15 to get a preliminary baseline of how much life insurance you need. However, this is a very basic assessment that doesn’t completely account for the full picture of you and your family’s finances. You will need to consider any dependents and outstanding debts — especially if you’re the primary source of income — the cost of end-of-life care, education or schooling expenses for any children and more.
The DIME formula — which stands for debt, income, mortgage and education — can help furnish a more thorough understanding of how much term life insurance you need:
If you add up all four of these figures, this will determine an estimate as to how much life insurance you need to take care of your beneficiaries’ future expenses, effectively alleviating the financial gap left behind if you are no longer able to provide income.
The key differences between term and whole life insurance can be summarized by whether or not there’s a cash value component and for how long each type of policy is active.
Term life insurance is straightforward in that it’s the most basic level of life insurance, and provides a death benefit only. Whole life insurance policies can get complex, as it provides both a death benefit in addition to a cash value component. Many whole life insurance clients use the accrued cash value to supplement retirement income while they are living; however, it should be noted there are better alternative investment vehicles than cash value, as it accrues slowly — especially during its infancy — over the insured’s lifetime.
Another significant difference between term and whole life insurance is the period of time covered. Term life insurance is a short-term policy that covers the owner for a fixed number of years and must be renewed to keep coverage in place. While premiums for term life insurance start low and level during the policy, they will increase in the future at every renewal period.
Whole life insurance (also known as cash value life insurance) covers you for the rest of your entire life, so it provides permanent coverage with level premiums while the policy accumulates cash value. With every premium payment you make, a percentage of it is diverted as cash value. The cost of whole life insurance is much higher than term life insurance, however, because coverage is in place for your lifetime and typically comes with more bells and whistles when it comes to a policy’s terms and conditions. And unlike term life insurance, there are also different types of permanent insurance — like universal life insurance — that allow some more flexibility.
Buying life insurance can be daunting — with so many factors to consider, we recommend you take it one step at a time to figure out your needs before diving into shopping. Here’s a step-by-step guide on how to buy a term life insurance policy.
A good rule of thumb is to multiply your annual income by 10 to 15. Calculate all over your outstanding debts, like your mortgage, credit cards, student loans, car loans and anything else that you owe money on. You will essentially need to identify how much of a financial gap will be left if you pass away. Using the DIME formula — and consulting a life insurance agent — will be helpful in determining a complete look at you and your family’s financial needs, along with their future expenses. During this time, you should also decide on how long of a term you’d prefer for your policy, and if you’ll need any additional riders to supplement your coverage.
Once you’ve decided on a death benefit that you and your beneficiaries are comfortable with, it’s time to start looking for the best life insurance company. Every company rates policies differently, and although term life insurance is quite affordable, you’ll still need to put some time in researching what a fair rate looks like.
Get life insurance quotes from the providers of your choice, and weigh each of their pros and cons. The cheapest option is sometimes not the best — it’s important to do some research into each company’s customer service and how they handle and process claims.
Once you’ve selected your life insurance company, you must complete the application and follow through on the rest of the application process — it usually involves a medical exam or physical and an evaluation of your lifestyle and hobbies. These are used during the underwriting process to finalize your policy and what you’ll be paying in premium.
If you’re in the process of shopping for a life insurance policy, consider Ethos: an affordable, flexible option for term and whole life insurance policies. Get a life insurance quote in just 10 minutes.
The Zebra is not an insurance company. We publish data-backed, expert-reviewed resources to help consumers make more informed insurance decisions.