Term life insurance pays a death benefit to your family if you die during the policy term. It is the simplest and most affordable type of life insurance. If you have people depending on your income, you probably need it. If you do not, you probably do not.
This guide explains how term life insurance works, how much coverage to buy, and what it costs.
How Term Life Insurance Works
You choose a coverage amount and a term length — typically 10, 20, or 30 years. You pay a monthly or annual premium. If you die during the term, your beneficiaries receive the death benefit tax-free. If you outlive the term, the policy expires and you receive nothing.
That last part sounds bad, but it is actually fine. The goal of life insurance is to protect your family while they depend on your income. By the time a 30-year term ends, your mortgage may be paid off, your kids may be grown, and your retirement savings may be large enough to replace your income. You no longer need the coverage.
Term vs. Whole Life Insurance
Whole life insurance covers you permanently and builds cash value. It costs five to 15 times more than term life for the same coverage amount. Most financial experts recommend buying term insurance and investing the difference in premiums rather than paying for whole life.
The main reason people buy whole life insurance is that an agent earns a much higher commission on it. That is not a reason you should buy it.
How Much Coverage Do You Need?
A common rule of thumb is 10 to 12 times your annual income. If you earn $75,000 per year, that means $750,000 to $900,000 in coverage.
A better approach is to add up what your family would actually need:
- Income replacement: How many years of income would your family need? Multiply your annual salary by those years.
- Mortgage payoff: Your remaining mortgage balance.
- Debt payoff: Any other debts you would want paid off.
- Education costs: College or future education expenses for your children.
- Final expenses: Funeral costs, medical bills, typically $15,000 to $25,000.
Subtract any existing savings and assets your family could use. The result is your coverage need.
What Term Length Should You Choose?
Choose a term that covers your working years and major financial obligations:
- 30-year term: Best if you have young children or a new mortgage. Covers you until your kids are grown and your home is paid off.
- 20-year term: Good for people in their 30s and 40s who want coverage through peak earning and family-raising years.
- 10-year term: Best for people close to retirement or those who expect their financial obligations to decrease significantly within a decade.
What Does Term Life Insurance Cost?
Term life insurance is more affordable than most people expect. A healthy 30-year-old nonsmoker can get $500,000 of 20-year term coverage for about $20 to $30 per month.
Factors that affect your rate:
- Age: The younger you buy, the cheaper the premium. Rates lock in when you apply.
- Health: You will answer health questions and may need a medical exam. Better health means lower rates.
- Coverage amount: More coverage costs more, but the rate per dollar of coverage often decreases at higher amounts.
- Term length: Longer terms cost more.
- Tobacco use: Smokers pay roughly two to three times more than nonsmokers.
How to Buy Term Life Insurance
The best way is to compare quotes from multiple insurers. Online comparison tools let you see rates from 10 to 20 companies side by side. Look for financially strong insurers — check ratings from AM Best or Standard and Poor’s. A rating of A or better is a good benchmark.
Once you pick a policy, you will complete an application and possibly a free in-home medical exam. Approval typically takes one to four weeks.
Who Does Not Need Life Insurance
You may not need life insurance if:
- You have no dependents and no debt your estate would owe
- You are retired with enough savings to replace your income
- Your employer provides enough coverage through a group policy (though group coverage ends when your job ends)
Bottom Line
Term life insurance is the most affordable way to protect your family’s financial future. If people depend on your income, you need it. Buy coverage equal to 10 to 12 times your income, choose a term that covers your working years, and lock in your rate while you are young and healthy. The cost is lower than most people assume.