What is Term Life Insurance?

Rebecca Parson
Rebecca Parson

Rebecca Parson

Author

Rebecca Parson is a financial and tech writer with 10 years of experience writing about topics such as life insurance, commodities investing, and the SaaS industry. She has a master’s degree from Johns Hopkins University and a bachelor’s degree from the University of Mary Washington. Her writing has appeared at money.com, sacbee.com, cart.com, herodevs.com, blanchardgold.com, and more.

Brian OConnel
Brian OConnel

Brian O'Connel

Contributor

Brian O’Connell has been a contributing writer for U.S News & World Report since 2016. A former Wall Street bond trader and the author of two best-selling books; “The 401k Millionaire” and “CNBC’s Creating Wealth”, he has 20 years experience covering business news and trends, particularly in the business and financial sectors. He believes education is the best gift a financial consumer can receive – and brings that philosophy to every story he writes. His byline has appeared in dozens of top-tier national business publications, including CBS News, Bloomberg, Time, MSN Money, The Wall Street Journal, CNBC, TheStreet.com, Yahoo Finance, CBS Marketwatch, and many more.

By Rebecca Parson, Brian O'Connel
Author, Contributor, Life Insurance

Key Takeaways

  • Term life insurance is the least expensive type of life insurance.
  • It guarantees a death benefit if you die during the policy’s term.
  • Terms last for a set number of years, not your entire life.
  • Term life policies don’t have a cash value or investment feature.
  • You can sell your term life policy if you don’t need it anymore.

What Is Term Life Insurance?

Term life insurance is a policy that pays a death benefit to your beneficiaries if you die during the policy’s term. Once the term ends, you can renew your term life policy, or you may be able to convert it to permanent (whole life) coverage. You can also let your term life insurance lapse.

How Does Term Life Insurance Work?

When you get a term life insurance policy, the company sets your premium based on the policy’s value and your age, gender, and health. Other factors include their business costs, and mortality rates for your age group.

Sometimes, you’ll need a medical exam. The insurance company might also ask about your driving record, current medications, smoking habits, job, and family medical history.

If you die while your policy is active, your beneficiaries will get a payout: the death benefit. This is not usually taxable, and beneficiaries can use it in any way they want. Creditors are not owed the death benefit, and your beneficiaries do not have to use it to pay off your consumer debt.

If you live longer than the policy lasts, there is no death benefit. You might be able to renew your term life policy, but the insurer will recalculate the premiums based on your age at that time. This will make the premiums higher.

How Much Does Term Life Insurance Cost?

Term life is usually about three to five times cheaper than whole life insurance. It’s the lowest-cost kind of life insurance because it’s not permanent (life-long) and doesn’t have a cash value or investment feature.

Most people outlive their term life policies, which means insurers pay fewer death benefits on these policies and can charge lower premiums.

Term Life Insurance Example

A 35-year-old man wants to protect his children and spouse if he unexpectedly dies young, so he buys a 15-year, $500,000 term life insurance policy for a $40 monthly premium. Here are some possible scenarios:

  • If he dies within the next 15 years, the insurer will pay his beneficiaries $500,000.
  • If he dies after the term expires, his beneficiaries will not receive money.
  • If he renews his policy, his premiums will be higher because he will be 50 years old then, not 35.
  • If he gets a terminal illness during the first 15-year term, the insurer will likely not renew his policy.

Types of Term Life Insurance

Level Term or Level-Premium Policy

Level term insurance offers a fixed death benefit and a constant premium throughout the term. It’s the most straightforward type of term life insurance and is often purchased for its predictability.

Yearly Renewable Term (YRT) Policy

Yearly renewable term (YRT) policies are one-year term life policies that you can renew each year, regardless of your health at the time of renewal. They’re a useful option if you need temporary insurance, but the premiums will rise every year.

While the increased cost might be a downside, the security of guaranteed insurability often outweighs this consideration, especially for those whose health worsens over the policy term.

Decreasing Term Policy

Decreasing term insurance includes a death benefit that decreases throughout the policy, typically annually, while the premiums generally remain the same. This 

type of life insurance is often tied to the repayment of a decreasing debt, such as a mortgage.

Increasing Term Policy

Increasing term insurance is a less common policy type where the death benefit increases over the policy term while the premium usually stays constant. It’s often used to keep pace with inflation or rising financial responsibilities.

Pros and Cons of Term Life Insurance

Term life insurance is a straightforward type of policy with the following advantages:

  • Affordable: Term life is usually the least expensive type of life insurance.
  • Level Premiums: Your monthly premiums will stay the same for the entire term.
  • Security: Your family will receive a substantial sum of money if you die during the term.

That said, term life has some disadvantages compared to other types of life insurance:

  • No Cash Value: You can’t use term life as a savings vehicle.
  • No Investment Feature: Since there’s no cash value, there’s no investment component.
  • Not Permanent: Your beneficiaries will not get a death benefit if you die after the term is over, unlike permanent life insurance, which lasts your whole life. 

Term Life Insurance vs. Permanent Life Insurance

Term life insurance is temporary, doesn’t offer a cash value or investment feature, and costs less. Permanent life insurance lasts your whole life, accumulates cash value, has an investment feature, and costs more.

Term Life Insurance vs. Convertible Term Life Insurance

Convertible term life insurance is a term life policy with a conversion rider. This lets policyholders convert their term life insurance into a whole life or universal life insurance policy without having to do a new medical exam or provide proof of insurability. This conversion can be done regardless of whether your health has changed since you first got the policy. 

The premium for the new permanent policy will be based on the policyholder’s age at the time of conversion. This rider can be immensely beneficial as it provides a way to maintain life insurance coverage even if the insured’s health has deteriorated. A conversion rider’s precise terms and conditions vary depending on the insurance provider.

Can I Sell My Term Life Insurance Policy?

Yes, you can sell your term life policy. If the insured is above 65, the policy is convertible, and the face value is over $100,000, the policy can be sold. If the insured is under 65 or the policy is not convertible, there may still be buyers if the insured’s health has deteriorated since purchasing the policy.

How Can I Tell If My Term Life Policy Is Convertible?

Review your policy documents to determine if your term life insurance policy has a conversion feature. You can contact your insurance company or your agent directly if the policy language is unclear. 

It’s also essential to note the conversion deadline, which refers to how long you have the option to convert your policy. This deadline is often defined as a certain age or a specific number of years from the policy’s initiation. 

If you’re considering a policy conversion, seek guidance from a trusted financial advisor to fully understand the implications and potential benefits of this action.

Can I Sell My Non-Convertible Term Life Policy?

You may be able to sell your term life insurance policy even if your policy doesn’t have a conversion privilege. Suppose the policyholder’s health has deteriorated significantly since the policy was purchased. In that case, some buyers will be willing to buy the non-convertible term-life policy as part of a larger pool of policies. This sale will not command the same cash offer as an identical policy with a conversion privilege. 

FAQs About Term Life 

Which Should I Get: Term Life or Whole Life?

If you’re young and healthy and need an inexpensive way to support your family if you die unexpectedly during your working years, term life can be a good choice. If you’re looking for life insurance that lasts your whole life and grows in value like a retirement account, whole life is your best option.

Will I Get Money Back at the End of a Term Life Insurance Policy?

No, you will not get money back from the insurer at the end of your term. You will not get your premiums back, and your beneficiaries will only receive the death benefit if you die during the term.

Which Type of Life Insurance Offers an Investment Feature?

Variable life insurance offers an investment feature that lets you choose where to invest your cash value: mutual, index, money market, or bond funds. With whole life insurance, the insurer chooses where to invest your cash value and provides a guaranteed rate of return.

In Conclusion

Term life insurance is useful if you’re supporting a family and want security for them in the unlikely event of your early death. It’s statistically improbable you’ll need it, but your family will be glad you bought it if the worst happens.


If you have a term life policy you’d like to sell, get in touch with us to discuss your options.

Sell your life insurance policy for cash.

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