Term Life Insurance FAQ

(Get your questions answered by the pros)

Written by Jessica Huneck
Written by Jessica Huneck

Jessica Huneck is an insurance writer from TrustedChoice.com. She began her writing career in 2011 and has since earned herself a bachelor's degree in English writing.


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 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.

Choosing the right term life insurance policy for your needs can be a challenge, and rates can vary widely. An independent agent in the Trusted Choice® network can help you get your questions answered about term life insurance and choose the policy and term that makes the most sense for you.


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What Does Term Life Insurance Cover?

Term life insurance is designed to provide death benefits to the named beneficiaries of the policyholder. People typically buy term life insurance to cover the cost of living for their families, as well as 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 up to as much as $2,000,000 dollars.

The expenses you want your term life insurance 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:

  • Estimate your family’s annual living expenses.
  • 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.
  • Calculate in the amount it would cost to pay off your mortgage.
  • 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.
  • You may even want to include the anticipated costs of your children's weddings among major financial expenditures you can foresee.

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

How Does Term Life Insurance Work?

Once you choose your , you will 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 also 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.

In another example, 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 – for example, 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 agent can help to assess your needs and make the best possible choices for your family.

How Much Is Term Life Insurance?

Your term life insurance cost will 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 premium include:

  • Your age and gender
  • The state of your health
  • Your lifestyle
  • Your family history
  • Your medical questionnaire or medical exam
  • Amount of death benefits you want
  • Length of the term you choose

As an example, a 35 year-old female non-smoker would be given a “Preferred” rating and could expect to pay $30 to $40 a month for a 20 year, $500,000 term life policy. By contrast, a 50-year-old male smoker would be given a “Standard” rating and could expect to pay $500 or more per month for the same 20-year, $500,000 term life policy.

The cost of term life insurance will vary widely – based on your age, health and other personal factors, as well as from one life insurance company to another. 

For this reason, it is important to work with an insurance agent who specializes in life insurance. An independent agent will present options from multiple life insurance companies and can get the help you need to make the best decision for your needs.

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 where 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 another person 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 as taxable.

It’s always best to seek the advice of your financial advisor, tax advisor or your insurance agent when you are 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 do not 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.

Note that you can lock in your premium rates if you buy guaranteed renewable term life, 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 policy holder, but it can be considered as an asset for the beneficiary. If you are 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 that is lost when a provider passes away. It can 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 to 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 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 amount 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.

An independent agent in the Trusted Choice network will help you to evaluate your options, compare quotes and complete the paperwork needed to get the life insurance policy that is right for you.

If your term life insurance application is denied – for example, if you have a high risk profile – your agent can help you to explore additional life insurance companies and options.

With so many life insurance companies and so many term life insurance policies available, it can be difficult to navigate the many choices and feel confident that you are making the best decision. 

A local independent agent in the Trusted Choice network who specializes in life insurance can help. These agents work for you, the consumer, not the insurance company. Your agent can find the most suitable term life insurance policy at the most affordable rates to suit your needs and your budget.

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