You probably know insurance is an option to financially protect you in tougher times, whether that's health insurance when you get sick or auto insurance if you're in a car accident. Life insurance is designed to help cover costs if you pass away unexpectedly, though permanent coverage can be costly. That's where term life insurance comes in.
What is term life insurance?
Term life insurance is an insurance policy that pays beneficiaries if you die while the policy is active. There's a set period for premiums, which is the amount you pay for coverage, aka the "term." The set premium term is typically between 10 and 40 years, but longer and shorter options exist. Coverage is typically available to those who are least 18 years old and are US citizens or permanent residents.
How does term life insurance work?
Term life insurance allows you to choose a specified term, as well as the amount that would be paid to beneficiaries, should you pass away unexpectedly. While some types of life insurance, like coverage through an employer, may not require traditional underwriting, term coverage usually does. Underwriting is the process where insurance companies review your health and lifestyle to ensure the right coverage can be provided at the most appropriate price. This process may require a medical exam or collecting other information. Once coverage is offered, premiums can usually be paid on a monthly, semiannual, or annual basis to an insurance company, and as long as those payments are up to date, your beneficiaries would receive a typically tax-free1 lump sum cash payout, or death benefit, if you die within that period. If you don't pay the premiums or renew when the term period ends, your beneficiaries would not receive a payout.
You can also consider adding riders to your policy that provide additional protection for an extra cost. These include an accidental death benefit (which may increase the payout to your beneficiaries if you die in an accident), family income (which provides a series of payments in addition to or in place of the lump sum payout), waiver of premium (which may pay your premiums while you are disabled), and return of premium (which refunds your premiums if you outlive your term).
Term life insurance vs. permanent life insurance
Permanent life insurance, another type of life insurance, works a bit differently than term life insurance. As the name suggests, it has a set premium that never changes, which generally leads to it being more expensive than term life insurance. In return for the higher premiums, permanent life insurance also offers a cash value that could grow over time and be borrowed from in times of need.
Features of term life insurance
There are a few different types of term life insurance:
Level term or level-premium
This type has fixed monthly payments and a fixed death benefit. This is the most common term life insurance type.
Yearly renewable term
One-year policies (better for those with short-term needs) allow you to renew or cancel each year. Premiums go up as you get older, reflecting health risks associated with age.
Decreasing term
With this type of policy, the death benefit decreases over time, as do the premiums. They're typically used so the payout can cover loans that shrink over time, like mortgages.
Convertible
Convertible term life insurance allows you to change term life to permanent life insurance without a new medical exam. This option may be particularly helpful if your recent health status would make you ineligible for a new life insurance policy.
Advantages of term life insurance
Term life insurance has some considerable pros:
- It's simpler and usually less expensive than permanent life insurance
- You can choose the term based on how long you need coverage
- You may be able to continue the policy beyond the term or convert it to permanent life insurance, though premiums may be pricier
- Your premiums are consistent if you choose a level-term policy
Disadvantages of term life insurance
There are drawbacks to consider before buying term life insurance:
- As with all life insurance, cost for coverage can increase based on applying at older ages
- Like most types of life insurance, it may require a medical exam, which can feel personal for some people
- It has no cash value component or investment option
- It doesn't pay dividends
- Premiums may increase upon renewal as the policyholder ages
Cost of term life insurance
The cost of term life insurance depends on the term, death benefit, policy type, your age (the younger you are, the less you'll pay), health, and other factors, including whether you're a smoker or have a high-risk hobby or job. Gender is also a price determinant. Women are less expensive to insure for term life insurance because they generally live longer.
For example, using Fidelity's term life quote tool,2 a $1 million, 20-year term policy for a 30-year-old, non-smoking male with above-average health would cost an estimated $46 per month.3 The same policy for a 30-year-old female in similar health would cost an estimated $36 per month.4
To reduce term life insurance premiums, consider decreasing the term length and/or death benefit or asking whether paying annually instead of monthly or semiannually would make the policy cheaper.
How much life insurance do you need?
To determine how much life insurance you need, one guideline for the amount is 10× to 12× your salary, plus any bonuses. That's designed to cover expenses for your loved ones in your absence. But also consider if you have any outstanding debt you don't want to burden loved ones with, like credit card debt or mortgages, as well as if you'd like to leave any legacy. For example, you might consider whether you have any children whose college tuition or other life milestones you might have planned to cover. Then make sure you choose a term that carries you through when you'd expect to fund these. For instance, if your child is 12, and they will start a 4-year college at 18, it may make sense to get a 10-year term (for the 6 years until they turn 18 + 4 years for college). Fidelity's Coverage Calculator2 can help you determine how much coverage you may need.
How to buy term life insurance
To buy term life insurance, follow these steps:
1. Determine term length and coverage amount. Again, think about what specific needs the death benefit would need to cover, whether it's higher education costs, a mortgage, or a wedding, and when this need would arise. Also, factor in any life insurance you may already have. Some employers provide coverage—for example, a death benefit of 1× your salary—with the option of increasing coverage for a fee. This could be a valuable cost-effective choice, especially if you have certain medical conditions that would preclude you from getting a policy on your own. (Read more about group life insurance through an employer.)
2. Research and compare policies. Look at requirements (like medical exams) and costs at various insurance carriers to ensure you're getting the most coverage for your money. You should also consider the financial strength ratings of each carrier, since the promises they are making to you are only as good as their ability to pay claims.
3. Consider riders. Though these add-ons that increase your coverage also raise your premiums, you may decide the extra peace of mind is worth it.
4. Fill out an application. You will be asked questions that deep-dive into personal details, like your height and weight, job, prescriptions, medical conditions, and whether you smoke. Honest and complete answers help speed up the review process.
5. Complete any required follow-ups. You may need to join a phone interview or undergo a medical exam.
6. Throughout the term, review your life insurance needs. This is especially important after major life events like marriage, divorce, welcoming children to your family, or buying a home or other major purchase because your beneficiaries and needs may change.
How to buy term life insurance at Fidelity
Fidelity offers term life insurance, and its buying process works like this:
1. Start with Fidelity's Coverage Calculator.2 It can help you determine how much coverage you may need.
2. Get an estimate using Fidelity's Quote Tool2 after answering a few questions, like your height, weight, gender, age, state of residence, whether you smoke, and how long and how much coverage you want.
3. You can complete your application online. This typically takes about 15 to 20 minutes, and it will be helpful to have your medical history handy.
4. If more information is needed, you will be emailed with additional requests, which may include medical exam requirements
5. If you're approved, you'll be contacted with a policy offer
6. If you're satisfied, simply accept and pay, and then you're covered