Term Life Insurance: How It Works and How Much to Get
Term life insurance pays a lump sum, called a death benefit, to the people you name if you die during a set period, the term. According to the Texas Department of Insurance (TDI), the term can be one year or anywhere from five to 30 years or longer, and the policy ends at the end of the term unless you pay to extend it.
Most people who buy it, TDI says, want coverage only for a period of time, such as while they're raising a family. This guide explains how age and health shape the premium, how to estimate a coverage amount, what renewable and convertible terms mean and what to check before and after you sign.
How term life insurance works
Washington's Office of the Insurance Commissioner describes life insurance as a contract between a policyholder and an insurer that promises to pay the policyholder's beneficiaries a sum of money when they die. A term policy provides that coverage for a specific number of years, costs more as you get older and has no cash value, so you can't cash it out.
If you live beyond the term, no benefit is payable, the California Department of Insurance notes. That is the trade-off behind the price: TDI's tip sheet calls term life the simplest and least expensive option.
Here is how TDI compares term with whole life, one of the two most common types of permanent coverage:
| Term life | Whole life | |
|---|---|---|
| How long it lasts | The period you choose, usually one year or five to 30 years or longer | Your entire life if you keep the policy |
| Premiums | Low at first but may go up each time you renew | Higher than term life at first, but usually don't go up |
| What it pays | Death benefits only | Death benefits, plus a possible cash value |
TDI also notes that most companies offer term life insurance only up to a certain age, usually 70 or 80.
How age and health shape the premium
In general, life insurance is cheaper when you are young and gets more expensive as you age, and your health history and life choices, such as smoking, play a key role in the cost, Washington's regulator says. TDI adds health conditions and risky hobbies like skydiving or rock climbing, along with the amount of coverage and the policy features you choose.
Insurers use a process called underwriting to decide whether to sell you a policy, TDI explains. It often includes passing a medical exam and answering questions about your health, job and habits, and a company can refuse to sell you a policy if it considers you a high risk. Washington's regulator adds that health information also helps the insurer set a premium that aligns with your health and life expectancy.
Answer health questions accurately
Washington's regulator warns that providing false health information could lead to the cancellation of your policy or no payment of benefits to your beneficiary. TDI explains that life policies have a two-year contestable period: if you die within it, the company may review your application and deny payment if you gave wrong information or didn't disclose something, even by mistake. If it denies payment, it must return the premiums to your beneficiary.
The CFPB's list of consumer reporting companies includes a medical category and suggests fact-checking your medical specialty report before or when applying for private life insurance. If you haven't applied for individual life or health insurance with a company that uses such a reporting company, it generally won't have a report for you to request.
Some rules are state-specific. In Washington, for example, life insurers can't refuse coverage based on your sex, gender identity, marital status, race, national origin or living organ donor status.
How much term life insurance to consider
TDI suggests adding up your mortgage and other debts, how much income would need to be replaced, money to cover a funeral and college for the kids. California's department cautions that being over-insured can hurt your budget and long-range goals as much as being under-insured can.
Suppose you're 35, your youngest child is 2, and your household would need $35,000 a year of your income for 20 years, until that child is 22.
| Need | Amount |
|---|---|
| Income replacement ($35,000 × 20 years) | $700,000 |
| Mortgage balance | $150,000 |
| Other debts | $10,000 |
| Funeral | $10,000 |
| College fund | $50,000 |
| Total needs | $920,000 |
| Minus existing savings | −$40,000 |
| Coverage gap | $880,000 |
A 20-year term bought at 35 would run until you're 55. If you also have $60,000 of group life through work, the gap falls to $820,000. Counting it is a judgment call: TDI notes that employer coverage typically ends when you leave your job, and that a basic group policy usually has a death benefit equal to one or two times your annual salary.
This method ignores inflation and what a payout could earn once invested, so treat the result as a starting range rather than a precise figure. Life coverage also doesn't protect property: replacing belongings after a fire or theft is the job of renters insurance or a homeowners policy.
Level, renewable and convertible term
TDI says premiums stay the same for the entire term and go up if you renew at the end of it, because the new premium is based on your age when you renew, not when you first bought the policy. To help avoid higher premiums later, it suggests considering a longer term.
| Feature | What it does | What to check |
|---|---|---|
| Renewability | Lets you extend the policy for additional terms regardless of your health, without a medical exam | Renewal premiums are based on your age at renewal |
| Convertibility | Lets you exchange the term policy for a permanent one without a medical exam or health questions | Converting raises premiums, and it's usually allowed only until a set age, typically 65 |
California's life insurance guide, revised in March 2018, also notes that term policies usually show two sets of premiums: guaranteed maximum premiums and current premiums. Current premiums are usually much lower, but the insurer can change them, though not above the guaranteed maximum shown in the policy.
Naming beneficiaries
Your beneficiary is the person your company pays after your death, and you can name more than one. According to TDI, you can leave money to a spouse, children, another family member or a friend, or name an institution such as a business or charity, and you can specify how the money will be divided.
A few rules are worth knowing:
- No beneficiary. If you don't name one, or your beneficiary has died, the company pays the death benefit to your estate, and your heirs might have to pay taxes on money they get from it.
- Divorce in Washington. An ex-spouse or former domestic partner can't be your beneficiary unless a court orders it or you fill out a new form listing them.
- Payment timing in Texas. Companies must pay the death benefit within two months after getting proof of death and verifying the beneficiary.
Before and after you sign
Check the license. TDI advises making sure the agent and company are licensed to sell insurance. If you buy from an unlicensed company, your beneficiary might not get paid if the company fails; licensed companies belong to a guaranty association that pays claims for failed companies. Your state regulator can help: in Washington, the commissioner's office can tell you how many complaints have been filed against an agent or broker and whether they've faced disciplinary action. It's a check worth running for any policy you buy, from life coverage to pet insurance.
Compare like with like. TDI suggests getting quotes from several companies, making sure the policies you compare offer similar coverage and not choosing on price alone.
Use the free-look period. Every new life insurance policy issued in Washington comes with a 10-day free look: you return the policy within 10 days after you receive it, and the company must return your premium within 30 days or pay a penalty. Texas policies have a free-look period of at least 10 to 20 days, during which you may cancel for any reason and get a full refund.
Keep it in force. According to TDI, most policies have a 31-day grace period after the premium's due date. If you don't pay within it, the policy lapses, and your beneficiaries won't get the death benefit.
Key takeaways
- Term life insurance pays a death benefit only if you die during the term, and it has no cash value.
- Age, health, smoking and risky hobbies shape the premium, which is set through underwriting.
- Size coverage from the income to replace, debts, funeral and college costs, minus your savings.
- Premiums stay level for the term; renewal is priced at your age then, and conversion usually has an age cutoff.
- Check licenses, compare similar policies and use your state's free-look period.
Sources
- Texas Department of Insurance — Life insurance guide
- Texas Department of Insurance — Do you need life insurance?
- Washington State Office of the Insurance Commissioner — Learn how life insurance works
- California Department of Insurance — Life Insurance Guide
- Consumer Financial Protection Bureau — List of consumer reporting companies
- Washington State Office of the Insurance Commissioner — Choosing an insurance agent or broker
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