Term life insurance is a type of temporary life insurance that covers you for a specific period of time — usually between 10 and 30 years. If you pass away during the coverage period, your beneficiaries receive a payout from the policy, which they can use to cover funeral expenses, household bills, or any remaining debts you may leave behind (among other things).

Payouts for term life insurance policies vary, but most companies offer options well into the millions (see Most Common Life Insurance Myths).

To determine the term life insurance amount you should purchase, you’ll want to think about many factors.

You can start by getting a free online price estimate now so you know exactly what to expect.

Term Life Insurance vs. Whole Life Insurance

Term Life Insurance vs. Whole Life Insurance

Term life policies have no value other than the guaranteed death benefit. There is no savings component as is found in a whole life insurance product (see Life Insurance a Good Way to Save Money).

Term life is usually the least costly life insurance available because it offers a benefit for a restricted time and provides only a death benefit.

For example, a healthy non-smoking man aged 35 could get a whole life insurance policy with a benefit of $500,000 for an average of $28 per month as of 2021. At age 50, the premium would rise to $71 a month.

Depending on the issuer, purchasing a whole life equivalent would have significantly higher premiums, possibly $200 to $300 per month, or more.

Most term life insurance policies expire without paying a death benefit. That lowers the overall risk to the insurer compared to a permanent life policy. The reduced risk allows insurers to charge lower premiums.

Interest rates, the financials of the insurance company, and state regulations can also affect premiums. In general, companies often offer better rates at the “breakpoint” coverage levels of $100,000, $250,000, $500,000, and $1,000,000.

How Term Life Insurance Works?

Term Life Insurance vs. Whole Life Insurance

When you buy a term life insurance policy, the insurance company determines the premium based on the policy’s value (the payout amount) and your age, gender, and health (see about Digital Life Insurance).

In some cases, a medical exam may be required. The insurance company may also inquire about your driving record, current medications, smoking status, occupation, hobbies, and family history.

If you die during the policy term, the insurer will pay the policy’s face value to your beneficiaries. This cash benefit—which is, in most cases, not taxable—may be used by beneficiaries to settle your healthcare and funeral costs, consumer debt, or mortgage debt, among other things.

If the policy expires before your death, there is no payout. You may be able to renew a term policy at its expiration, but the premiums will be recalculated based on your age at the time of renewal (see Life Insurance Industry Results).

Benefits of Term Life Insurance

Term life insurance is attractive to young people with children. The parents can obtain substantial coverage for a low cost. If the payout is needed, the family can rely on it to replace lost income.

Policies are also well-suited for people with growing families. They can anticipate that coverage will be needed until, say, their children have reached adulthood and are self-sufficient.

The term life benefit, obviously, may be equally useful to an older surviving spouse. However, other options for providing for a surviving spouse may be preferable given the higher costs of the premiums to older policyholders. Insurance companies set a maximum age for their term life insurance coverage.

What is whole life insurance?

Term Life Insurance vs. Whole Life Insurance

Whole life insurance is a type of permanent life insurance that pays a death benefit when you die. These policies, which include traditional whole life, universal life and variable life, provide life insurance protection for your entire life. They also offer level premiums, meaning your monthly payments will remain the same (see Distribution Model in Life Insurance).

Whole life policies include a cash value savings account. A portion of your premiums is invested and grows tax-deferred over time at a guaranteed rate—typically 1% to 2%, which is set by your insurance company.

Cash value is what distinguishes whole life insurance from other life insurance types. Your cash value typically takes 10 years or more to break even with your premiums. As your account grows, you may have the opportunity to make withdrawals and loans against your cash value.  The cash benefits of a whole life insurance policy are significant.

How whole life insurance works?

Premiums for whole life insurance are the same amount for the life of the policy. As a result, the premiums for whole life insurance are typically higher when you first purchase insurance than they are for a term life insurance policy (see Why You Should Get Life Insurance?). 

However, if you take out a term policy and renew it several years from now, the premiums for the renewed term life policy would likely be higher than the premiums you might pay on a whole life insurance policy. Many insurance experts recommend purchasing whole life insurance when you are younger to lock in a lower rate.

As mentioned, whole life insurance policies include an investment component that builds cash value over time. Depending on your policy terms about access to your funds, you may be able to make a withdrawal or loan against your cash value.

How much term life insurance do you need?

Term Life Insurance vs. Whole Life Insurance

Here are four questions that will help you better determine how much term life insurance you may need.

Do I need term life insurance or permanent Life Insurance?

The main differences between a term life insurance policy and a permanent insurance policy, such as universal life insurance, are the duration of the policy, the accumulation of a cash value, and the cost. The right choice for you will depend on your needs. Here are some things to consider.

Cost of Premiums

Term life policies are ideal for people who want substantial coverage at a low cost.

People who own whole life insurance pay more in premiums for less coverage but have the security of knowing they are protected for life.

People who buy term life are paying premiums for an extended period, and getting nothing in return unless they have the misfortune to die before the term expires. And, term life insurance premiums increase with age.

This means that term life premiums may cost more over the years than permanent life insurance premiums would have been. 

Do you have dependents?

If you’re single, you may only want enough coverage to pay for your funeral, burial, and any outstanding debts you leave behind so your loved ones don’t have to foot the bill themselves.

If you have dependents, however, like kids or a spouse, you’ll probably want extra coverage, particularly if you contribute income to the household.

Many experts say to multiply your annual income times 10 and then add in $100,000 per child for possible college education costs.

Are you the sole income earner for your household?

Term Life Insurance vs. Whole Life Insurance

If your spouse is a stay-at-home parent or otherwise doesn’t work outside the home, you’ll want to increase your payout even more.

Should you pass, they may need to return to work, and their at-home duties would need to be replaced by another provider, like a nanny, housekeeper, or someone else. Make sure your policy has enough coverage to account for these extra costs in your absence.

You can get a free online price quote here now to see how much a policy could cost. 

How much debt do you have?

You don’t want to leave your loved ones saddled with debts they can’t repay. To ensure your policy will pay out enough to cover them, add up the balances on any mortgages, credit cards, student loans, and any other loans you have in your name.

You should also include the debts your spouse or others in your household may have, as these will need to be paid off eventually, too. 

Then, add all your other needs — funeral, burial, salary replacement, and possible home services — and that’s about how much term life insurance coverage you’ll want to aim for.

What assets are you leaving behind?

If you have assets that you’ll leave for your heirs — liquid ones like savings accounts or college funds, for example — you can subtract those from the number you got above.

Keep in mind, though: Circumstances can change quickly, so having an extra buffer never hurts. You may have medical bills or other end-of-life expenses you can’t plan for.

Example of Term Life Insurance

Term Life Insurance vs. Whole Life Insurance

Thirty-year-old George wants to protect his family in the unlikely event of his early death. He buys a 10-year, $500,000 term life insurance policy with a premium of $50 per month.

If George dies within the 10-year term, the policy will pay George’s beneficiary $500,000. If he dies after he turns 40, when the policy has expired, his beneficiary will receive no benefit. If he renews the policy, the premiums will be higher than his initial policy because they will be based on his current age of 40 rather than 30.

If George is diagnosed with a terminal illness during the first policy term, he probably will not be eligible to renew the policy when it expires. Some policies offer guaranteed re-insurability (without proof of insurability), but such features, when available, come with a higher cost.

Do You get your money back at the end of a Term Life Insurance Policy?

If you’re alive when the term expires, you get nothing back from your term life insurance policy. It is a death benefit, payable to your heirs only if you die.

That is the reason why term life insurance is relatively inexpensive. Most people outlive their term life insurance policies.

Choose what’s right for you

There’s no set amount or hard-and-fast formula for determining how much term life insurance coverage you need.

You also may want to consider other life insurance types, like whole life insurance, variable life insurance, or universal life insurance, depending on your circumstances.

If you’re not sure what type of life insurance to choose or how much coverage to get, consider speaking to an independent insurance agent. They can help you shop around for your policy, compare insurance companies, and get the best coverage for your budget and needs.


Nataly Kramer   by Nataly Kramer

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