Term life insurance is life insurance that covers you for a set number of years, then ends

A term life insurance policy is a contract between you and an insurance company. You pay a monthly or annual premium. If you die while the policy is active, the insurance company pays a sum of money — called the death benefit — to the person or people you name as beneficiaries. When the term ends, the policy expires. You get no money back, and coverage stops unless you renew or buy a new policy.

The term is the fixed length of time the policy lasts. Common terms are 10, 20, or 30 years. Some policies offer 5-year or 40-year terms, depending on the insurer. You choose the term length when you buy the policy, and it does not change unless you modify the contract.

Term life is different from permanent life insurance (whole life or universal life), which lasts your entire lifetime and builds cash value. Term policies are simpler and cost far less per month because the insurance company knows the coverage will end.

Key Takeaways

  • Term life insurance covers you for a specific number of years (the term), and the policy expires when that period ends.
  • You pay a fixed monthly or annual premium, and if you die during the term, your beneficiaries receive the death benefit you chose.
  • The death benefit is tax-free to your beneficiaries and can be used for any purpose — mortgage, debt, living expenses, or funeral costs.
  • Your age, health, and how much coverage you want determine your premium; younger and healthier people pay less.
  • If you outlive the term, the policy ends with no payout, and you must buy a new policy if you still need coverage.

How the death benefit works

When you buy a term policy, you choose a death benefit amount — for example, $250,000 or $500,000. This is the lump sum your beneficiaries will receive if you die while the policy is in force. The death benefit is paid out as a single payment, though some policies allow beneficiaries to take it in installments.

The death benefit is income tax-free to your beneficiaries. They can use it for any reason: paying off a mortgage, covering funeral expenses, replacing lost income, paying off credit card debt, or putting it toward education. There are no restrictions on how the money is spent.

The death benefit does not change during the term unless you request a change to your policy. Some policies allow you to increase or decrease the benefit amount, though changes may require a new health evaluation and can affect your premium.

What affects your premium

Your monthly or annual premium depends on several factors. Age is the biggest one — the younger you are when you buy the policy, the lower your premium will be. A 30-year-old and a 50-year-old buying identical 20-year terms will pay very different amounts.

Health status also matters. Insurers ask about your medical history, current medications, and sometimes require a medical exam. People with chronic conditions, a history of serious illness, or who smoke will pay higher premiums than those in good health. Some insurers offer policies without a medical exam, but premiums are usually higher.

The death benefit amount you choose affects the cost — a $1 million benefit costs more than a $250,000 benefit. The length of the term also matters: a 10-year term has a lower total cost than a 30-year term, though the monthly payment may be similar or even lower because you are paying for fewer years of coverage.

Occupation and hobbies can raise your premium if your job or activities are considered high-risk. Smokers pay significantly more — sometimes two to three times the premium of non-smokers.

Renewing or converting when the term ends

When your term expires, you have three main options. You can renew the policy for another term, though your premium will be higher because you are older. You can convert the policy to permanent life insurance without a new health exam — useful if your health has declined. Or you can let the policy end and buy a new term policy if you still need coverage.

Not all policies offer renewal or conversion, so check your contract. Some policies allow you to renew only up to a certain age, such as 75 or 80. Conversion options also have limits — you may only be able to convert up to a certain age or within a set number of years after the policy starts.

If you let the policy expire and want coverage later, you will need to apply for a new policy and go through underwriting again. Your age and health at that time will determine whether you are approved and what you will pay.

When term life makes sense

Term life is often the right choice if you need coverage for a specific period. Parents with young children often buy 20 or 30-year terms to cover the years until their kids are grown. People with a mortgage may buy a term that matches the loan length. Business owners sometimes use term policies to cover key person insurance or buy-sell agreements.

Term life is also the most affordable option if you need a large death benefit. Because premiums are low, you can buy more coverage for the same monthly cost compared to permanent insurance.

Term life is less useful if you need lifetime coverage or want a policy that builds cash value. It is also not the right choice if you know you will not be able to afford a new policy when the term ends — in that case, permanent insurance or a longer term might be better.

The difference between level and decreasing term

Level term is the most common type. Your death benefit and premium stay the same throughout the entire term. You know exactly what you will pay each month for the full 20 or 30 years.

Decreasing term is less common. Your death benefit gets smaller each year, but your premium stays low and fixed. This type is sometimes used to cover a debt that shrinks over time, like a mortgage. As you pay down the loan, the death benefit decreases to match. Premiums are lower than level term because the insurance company's risk decreases.

Most people choose level term because it is simpler and the benefit does not change. Decreasing term is useful only in specific situations where your coverage need is expected to shrink.

Frequently Asked Questions

What happens if I stop paying my premium?

Your policy will lapse, and coverage ends. Most insurers give a grace period of 30 days to pay a missed premium before the policy terminates. Once it lapses, you lose coverage immediately. If you die during the lapse, no death benefit is paid. You can usually reinstate a lapsed policy within a set time frame by paying back premiums and sometimes undergoing a new health exam.

Can I change my death benefit or term length after I buy the policy?

Some policies allow changes, but not all. You may be able to increase your benefit if you pass a new health exam, or decrease it without an exam. Changing the term length is usually not possible — you would need to buy a new policy. Check your policy documents or contact your insurer to see what changes are allowed.

Is term life insurance the same as life insurance?

No. Life insurance is the broad category. Term life is one type — it covers you for a set number of years. Permanent life insurance (whole life, universal life, variable universal life) is another type that lasts your whole life and builds cash value. Both are forms of life insurance, but they work differently and cost different amounts.

What if I have a pre-existing health condition?

You can still buy term life insurance, but your premium will be higher than someone in good health. Some insurers specialize in coverage for people with health conditions. You may also find policies that do not require a medical exam, though those premiums are usually higher across the board. Be honest about your health history — insurers verify medical records, and lying can result in denial of a death benefit claim.

Do I need a medical exam to buy term life?

It depends on the policy and the death benefit amount. Smaller death benefits (often under $250,000) may not require an exam — the insurer uses a health questionnaire instead. Larger benefits usually require a medical exam, which is free and done by a nurse or doctor. Some insurers offer no-exam policies at any benefit level, but premiums are higher because the company takes on more risk.