Term Life Insurance FAQs

Term life insurance can be one of the most affordable ways to protect your family's financial interests. Term life insurance is designed to cover you for a set period of time and can provide a death benefit payout to the person of your choice if you pass away while your policy is active. Term life insurance policies are popular because they can be an affordable alternative to permanent life insurance policies. 

An independent insurance agent can help you get set up with term life insurance if you're ready to find a policy. They'll help you choose the appropriate coverage term and amount for you and your family. But first, you can use our guide to some of the most frequently asked questions about term life insurance to learn more about whether this coverage may be right for you.

Key Takeaways - Term Life Insurance FAQs

• Term life insurance is designed to cover you for a set period of time, such as 10, 20, or 30 years.
• Term life insurance can be an affordable alternative to whole or permanent life insurance policies.
• People buy term life insurance to provide a death benefit payout to the beneficiary of their choice if they pass away during the policy's term.
• The cost of term life insurance can vary depending on your age, health status, lifestyle, and other factors.
• Working with an independent insurance agent is strongly recommended, as they can shop and compare policies and quotes from several carriers for you and tailor a policy to your unique needs. 

Table of Contents

Q.What Is Term Life Insurance?

Q.What Does Term Life Insurance Cover?

Q.How Does Term Life Insurance Work?

Q.How Much Is Term Life Insurance?

Q.Is Term Life Insurance Taxable?

Q.When to Get Term Life Insurance

Q.Is Term Life Insurance an Asset?

Q.Why Is Term Life Insurance Important?

Q.How to Buy Term Life Insurance

What Is Term Life Insurance?

Term life insurance is a type of life insurance policy that provides a death benefit to the policyholder’s beneficiaries if that person dies within the specified “term” of the policy. Terms are typically set for 10, 20, or 30 years, but you can buy term life insurance anywhere from one to 40 years. This coverage differs from permanent or whole life insurance policies, which are designed to cover the policyholder for their entire life. 

You may have asked, "How does term life insurance work?" You select a beneficiary or multiple beneficiaries who you would like to receive the death benefit if you pass away while your policy's term is active. This can be a person or people, such as a spouse or dependents, like children, or it can be an institution, like a college or charity. If you pass away during your coverage term, your selected beneficiaries will receive the death benefit payout specified in your term life insurance policy. 

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What Does Term Life Insurance Cover?

Term life insurance is designed to provide death benefits to the policyholder's named beneficiaries. People typically buy term life insurance to cover the cost of living for their families and large expenses like college tuition in the event that they pass away during a specified term. Sometimes, people buy just enough term life insurance to cover end-of-life expenses and funeral costs.

When you buy term life insurance, you select a term, such as 10, 20, or 30 years, and an amount of coverage, typically ranging from $25,000 to as much as $2 million.

How much term life insurance coverage do you need?

The expenses you want your death benefit to cover should dictate the amount of term life insurance you buy. For example, you might want to factor in your family's anticipated future costs as follows:

1. Estimate your family’s annual living expenses.
2. Add any anticipated costs your family will face in the foreseeable future. For example, if you know the family car will need to be replaced within a few years, you could add the cost of a new vehicle.
3. Calculate the amount it would cost to pay off your mortgage.
4. If your children are still in school, add the cost of their college education, in addition to the costs of their annual activities, sports and music lessons.
5. You may even want to include the anticipated costs of your children's weddings among the major financial expenditures you can foresee.

Once you add up the expenses you want your term life insurance to cover, you can deduct any assets, such as savings and investments, that would also help to cover those costs to arrive at an appropriate coverage amount. An independent insurance agent can also help you calculate how much term life insurance you need.

How Does Term Life Insurance Work?

Once you choose your policy, you pay a premium to the life insurance company to keep the policy in force until the end of the defined term, or the end of your life, whichever comes first. You may have the option of paying the premium annually, monthly, or as a lump-sum payment up front.

If you pass away during the specified term of the policy, your designated beneficiary will receive the death benefits from your policy. The beneficiary will choose how to receive these benefits. One option is a lump sum payment, but there are also annuity options, which provide a yearly payout.

For example, let’s say your surviving spouse wants a guaranteed income for the rest of her life. In this case, the life insurance company would choose the annual benefit amount based on the size of the policy and her age. If she should pass away, the life insurance company would retain the remaining balance.

If there are multiple beneficiaries, they could choose a “last survivor income” annuity benefit, which would pay life payments until the last beneficiary dies. If the beneficiary is a minor, another option is an “interest income” payout, which makes guaranteed payments toward the interest on the death benefit for a specified time, such as until the minor comes of age, at which point the benefit amount becomes available to that beneficiary.

Term life insurance is a highly flexible vehicle that can help you plan for a wide range of future needs. An independent insurance agent can help to assess your needs and make the right coverage choices for your family.

How Much Is Term Life Insurance?

The average cost of 20-year term life insurance with $500,000 in coverage is $23 per month for women and $28 per month for men. Your term life insurance cost can depend on a number of factors, including the underwriting requirements of the insurance company you choose. Your life insurance company will assess your health profile and assign you a rating, such as “Standard” or “Preferred.” Some of the factors that affect your rating and your term life insurance premium include:

The cost of term life insurance can vary considerably based on your age, health, and other personal factors, as well as from one life insurance company to another. That's why it's helpful to work with an independent insurance agent who specializes in term life insurance. Your agent can help you find the best term life insurance policy by shopping and comparing term life quotes from several different carriers. They'll help you find affordable life insurance and can also recommend ways to reduce your premium rates, such as by maintaining a healthy lifestyle.

Is Term Life Insurance Taxable?

Term life insurance is not taxable if the death benefits are payable to a named beneficiary, which must be a real person. However, there are several situations in which term life insurance proceeds may become taxable, such as in the following scenarios:

• Estate named as beneficiary: The death benefits proceeds may be considered part of your estate and could be subject to federal or state estate taxes.
• Incidents of ownership: This situation occurs if you cancel, surrender, pledge or assign the policy or have the ability to change the name of the beneficiary. Under any of these circumstances, the proceeds may be taxable.
• Third-party ownership: This occurs when one person buys a policy (the owner of the policy) for another person (the insured) who then designates someone else as the beneficiary. An example might be if a parent buys a policy for a child who then designates his or her spouse as beneficiary. The spouse could be seen as receiving the insurance proceeds as a gift, which might be considered taxable.

It’s recommended to seek the advice of your financial advisor, tax advisor, or independent insurance agent when buying a life insurance policy, naming your beneficiaries, and making any changes to your policy, as to whether those choices may result in tax consequences.

When to Get Term Life Insurance

Many people buy life insurance when they get married, buy a home, or start a family. These are excellent times to buy term life insurance, because you can ensure that the financial obligations of your home and family don't later become a large burden for your survivors if you die unexpectedly.

While term life insurance is most affordable while you are younger than 50 years old, people buy term life insurance at all stages and phases of life to meet specific financial objectives. For example, some buy life insurance if they have accumulated debts or are concerned about leaving family members with hospital and funeral expenses.

Try to buy your term life insurance at the youngest age possible. The costs of life insurance increase with age, particularly if you develop health challenges. Once you buy your life insurance policy, your premiums are typically guaranteed for the life of the term, which is similar to locking in your mortgage rate. You can typically lock in your premium rates if you buy guaranteed renewable term life insurance, but not if you buy annual renewable term life insurance.

Is Term Life Insurance an Asset?

A term life insurance policy is not an asset for the policyholder, but it can be considered an asset for the beneficiary. If you're looking for a life insurance policy as an investment vehicle, you may want to consider a permanent life insurance policy, such as whole life insurance or universal life insurance.

Why Is Term Life Insurance Important?

Term life insurance is important because it provides financial protection for your loved ones if you die unexpectedly during the term specified in your policy. The loss of income from a primary wage earner can be financially devastating to a family. Term life insurance can be especially valuable and important for people with limited means or savings because of its affordability and the security it can provide.

A term life insurance policy can help cover the income lost when a provider passes away. It can also cover the costs of a mortgage, outstanding debts, college tuition, daily living expenses, and end-of-life costs. Most importantly, it can help a family maintain a standard of living, which can be a huge challenge for a family with a single parent.

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How to Buy Term Life Insurance

When you want to buy term life insurance, evaluate your family’s financial needs and the length of time you want the coverage. Term life insurance is especially vital if you are the primary earner in your household and have dependents or are starting a family.

Working with an independent insurance agent can help you make these important determinations:

1. What are your family’s financial needs in the coming years, and how much term life insurance do you need to meet those needs?
2. What term length makes the most sense for you and your family?
3. How many term life insurance quotes would you like to compare? (Note that you will not have this option if you go directly to a life insurance company or work with a “captive” agent.)
4. What type of term life insurance do you want? You can choose from:
   • Annual renewable: This means you buy a term life insurance policy, which is renewed every year up to a specific number of years.
   • Guaranteed renewable (level term): This type of term life is set for a specific period of time, and your premiums are guaranteed for that period.

Once you make these determinations and review quotes, you will need to complete an application which you or your agent will submit to the life insurance company. The life insurance company will review the application and may require you to take a medical exam. If your term life insurance application is denied, for example, if you have a high-risk profile, your agent can help you explore additional life insurance companies and options.

Can You Convert Term Life Insurance to Whole Life Insurance?

Yes, in many cases, you can convert a term life insurance policy to whole life insurance before your policy's term ends. You might choose to convert term life insurance to whole life insurance for any of the following reasons:

• Building savings
• Estate planning
• Providing for a lifelong dependent
• Covering expenses for a health issue

It's also possible you'll want to convert term life to a whole life insurance policy because you're now able to afford the premiums, whereas before you could only afford term life insurance. An independent insurance agent can help you evaluate your options when it comes to term life insurance vs. whole life policies and decide if converting term life makes sense for you.

What Happens When a Term Life Policy Expires?

When your term life insurance policy expires, your coverage will end, and your beneficiaries will no longer receive a death benefit if you should pass away. You have a few options when your term life policy expires, such as converting it to a whole or permanent life policy or simply renewing your term life coverage for a higher premium. You can also purchase a new term life insurance policy, but your premium rate will likely be higher because you're now older. 

Can I Get Term Life Insurance Without a Medical Exam?

Yes, some insurers offer term life insurance policies without a medical exam. However, it's more common to find permanent life insurance policies offered with no medical exam or questionnaire. An independent insurance agent can help you review your term life coverage options to find a policy with no medical exam required. 

Can I Have More Than One Term Life Policy?

Yes, you can have more than one term life insurance policy. You can have policies from different insurance companies with different death benefit amounts. Many people choose to do this to select multiple beneficiaries in case they pass away within their coverage term. 

How Do Beneficiaries Claim a Term Life Policy Payout?

A term life insurance beneficiary must file a claim through the insurance company and then provide any necessary documents, such as a death certificate, to receive the death benefit payout. An independent insurance agent can help file term life insurance claims for you and walk you through the process. They can also keep you updated every step of the way, including when you can expect to receive the term life insurance policy's payout. 

How Can an Independent Insurance Agent Help?

Independent insurance agents have access to multiple term life insurance companies, so they're free to shop and compare policy options and quotes for you to find the best coverage. They'll walk you through your options and make sure you understand exactly what you're getting. And down the road, your agent can help your beneficiary file term life insurance claims or update your coverage when necessary.