What is Term Life Insurance?

Many consumers wonder, what is term life insurance and how does term life insurance work? For many, finding term life insurance information to answer these and other questions is a challenge.

Term life insurance provides coverage for a pre-defined period of time, or "term." The amount of the premiums can be fixed and remain unchanged for the duration of the term. While the length of the term and other specifics vary, the death benefit in a term life policy can stay the same for as long as 30 years. Term life coverage tends to be less expensive than whole or universal life coverage and is favored by consumers who know they want life insurance only for a specified period of time. There are five main types of term life insurance:

There are five main types of term life insurance:

  • Renewable
  • Level
  • Decreasing
  • Convertible
  • Return of Premium

    Renewable Term. A renewable term life insurance policy continues in force for a specified term or terms, usually in increments of one or five years. It can be renewed without the insured having to undergo a medical examination or provide other evidence of good health or insurability each year. The premium for a renewable term policy generally is based on the insured’s current or attained age.

    Level Term. Level term life insurance policies provide a fixed amount of coverage with premiums that remain stable over a certain period of time, usually in five- to 10-year increments. Common durations for level term insurance include:

    • 10-year term
    • 15-year term
    • 20-year term
    • 30-year term

    There are also policies that set the term to a specified age (usually 65).

    Decreasing Term. A decreasing term life insurance policy provides benefits that gradually decrease in value over the term of the coverage. The monthly premiums will remain the same, but the amount of coverage provided will go down in value. Many policy holders use benefits from decreasing term insurance coverage to pay off mortgages, which also tend to gradually decrease over time.

    Convertible Term. Convertible term life insurance gives policyholders the right to exchange their term policy for a permanent or cash-value policy, without a required medical exam or other evidence of insurability. Many people purchase convertible term life insurance when they are younger, because the premiums are cheaper than standard term life policies but the coverage generally is the same. Later in life, convertible term policy holders may find the coverage is no longer enough to adequately protect them, so they decide to convert their coverage and upgrade to a permanent or cash-value term policy.

    However, bear in mind that converting a term policy to a type of permanent life insurance generally results in a higher monthly premium. Also, the amount of time allowed by carriers to convert policies is shorter than the duration of the term coverage, so be careful not to let a conversion deadline pass.

    Return of Premium (ROP). In most types of term life insurance, if an insured has not filed a claim by the time the policy term expires, there is no refund of monthly premiums paid during the term. However, return of premium term life insurance gives back to policyholders the amount of premiums paid at the end of the policy term, minus any administrative charges, fees, or other costs.

    Monthly premiums for return of premium insurance policies are often significantly higher than for policies without the repayment feature and generally, insured parties are required to keep the policy in force to the end of the term or forfeit the return of premium benefit.

    This article is adapted from information provided by the Insurance Information Institute.