What is Term Life Insurance?

You’ve probably heard that life insurance is a way to protect loved ones who depend on your income. But not all life insurance is created equally. There are two main types of life insurance policies: term and permanent.

What’s the difference between term and permanent life insurance?

While there are a few differences between term and permanent life insurance, their primary distinguishing factor is length. Term policies cover you for a set period of years, or a term. Permanent life insurance, on the other hand, has you protected until death or premium non-payment do you part.

Because you’re virtually guaranteed a payout through permanent life insurance, it generally comes at a much higher cost: Expect to pay up to six to 10 times more for permanent life insurance over term, according to PolicyGenius. 

Is permanent life insurance worth the cost?

Well, that depends on your goals and your personal financial situation. Some people choose to use permanent life insurance as a kind of investment vehicle because permanent life policies often build up value as you pay your premiums. That means you may be able to borrow against what you’ve contributed or start taking regular payouts from your policy before you’ve passed.

Term life insurance doesn’t offer any kind of payment unless you pass away during the policy term. The payout goes to your beneficiaries. 

While that lack of guaranteed payout may make term life insurance seem like a comparatively worse investment, the savings you reap from monthly premiums may benefit you more in the long term.

How much does term life insurance cost?

Term life insurance costs much less to purchase than permanent life insurance. A healthy 35-year-old man in Washington, D.C., for instance, might pay only $32 a month for a term policy but could see premiums of more than $500 a month for whole life coverage.

By paying less of a monthly premium, you have more money to put toward other things—like your savings and investments. Though permanent life insurance offers a large payout or regular installment payments later in life, you may be able to outearn it by regularly investing your money.

While there’s no guarantee money you invest will outperform a permanent life insurance policy, most of these policies work by investing your money in the stock market and then providing a portion of returns back to you. By investing yourself you take on more risk—the market may not outperform what a policy guarantees—but you also cut out the middleman and may reap better returns. You do need to be disciplined about saving and investing that money though. 

How does term life insurance work?

Term life insurance functions similarly to other types of insurance, like disability insurance or car insurance. You pay a monthly premium that goes into a pool with other policyholders’ premiums. Then, if anyone needs to make a claim, the insurance company pays out from the pool. This helps spread risk around, but it also means you don’t accumulate any individual cash value and if you pass away after your term ends and you haven’t renewed, your loved ones won’t receive any pay out.

A quick note, though: While term life insurance has an end date, some insurers may allow you to convert a term policy into a permanent one at the end of your term. You can also always sign up for another term-life policy if you still need coverage after your previous policy ends. Be aware that it could be more expensive if your health has declined.

Do I need term life insurance?

Term life insurance isn’t for everyone—particularly single people with no dependents—but if loved ones would be affected financially by your death, a term life insurance policy can help ease the burden of your passing.

People who might consider term life insurance include parents with young children, those whose spouses depend to some degree on their income and anyone with significant debt, including student loan debt or a mortgage, that was co-signed by another person. A life insurance policy may also help cover funeral and other related costs.

How much term life insurance do I need?

For those who need term life insurance, most insurance companies recommend you get coverage for around 10 times your annual income. Your individual circumstances may vary, though, based on how much your loved ones depend on your income and the amount of debt you have, among other factors.

Keep in mind that calculating your life insurance needs isn’t a one-time-only event. The amount of life insurance you need will probably change over the course of your life. 

Older people with grown children and a paid-off home, for example, might have enough money in savings and investments to cover any expenses related to their passing, making them less likely to need the kind of protection life insurance can provide, though they may still want to provide additional funds to loved ones through insurance coverage. Conversely, young people who in the past haven’t needed the security life insurance provides may find they want it as their families and financial obligations grow.

Because of the varied nature of everyone’s finances, you may want to check with a financial professional to help you determine how much life insurance coverage you may need.

How can I get life insurance?

Most leading insurers provide term life insurance policies.