What Is Term Life Insurance and How Does It Work?

Short answer: Term life insurance is life insurance you buy for a set period, such as 10 or 20 years. You pay premiums, and if you die during the term, the policy pays a lump sum, called a death benefit, to your beneficiaries. If you're still living when the term ends, the coverage stops and no benefit is paid. The National Association of Insurance Commissioners (NAIC) describes it as designed to provide lower-cost coverage for a specific period.

What Is Term Life Insurance?

The NAIC defines term life insurance as a policy you buy for a certain period of time, like a 10-year or 20-year period. The policy pays money to the named beneficiaries if the insured person dies during the term.

The Texas Department of Insurance adds that the term can be for one year, or anywhere from five to 30 years or longer, and that you choose the length. The other main kind of life insurance is permanent, or cash value, insurance, such as whole life. Our guide to term vs. whole life insurance compares the two side by side.

How Does Term Life Insurance Work?

A term policy has a few moving parts. Here's how they fit together:

1. You pick a coverage amount and a term. The coverage amount, also called the face amount, is what the policy pays if you die. The term is how long the coverage lasts.
2. You name your beneficiaries. These are the people the insurance company pays after your death. You can name more than one. If you don't name a beneficiary, or your beneficiary has died, the company pays the death benefit to your estate.
3. You pay premiums. On many policies, premiums stay the same for the entire term, according to the Texas Department of Insurance.
4. If you die during the term, the company pays the face amount of the policy to your beneficiary.
5. If you outlive the term, no benefit is payable. The Texas Department of Insurance notes the policy ends at the end of the term, unless you pay to extend it.

Keep paying on time. New York's Department of Financial Services notes that if you don't pay the premium on a term policy, it will generally lapse without cash value.

What Are the Main Types of Term Life Insurance?

Term policies come in several forms. Some features can be combined in one policy, so ask which ones yours includes.

Type	How it works
Level term	The face amount stays the same for the entire period.
Decreasing term	The face amount gets smaller over the period, while the premium stays the same each year.
Renewable term	Gives you the right to renew for another period when a term ends, without proof of good health. The premium goes up with each new term.
Convertible term	Lets you exchange the policy for a permanent plan during a conversion period, without answering health questions.

Sources: New York Department of Financial Services and Texas Department of Insurance.

Can You Renew or Convert a Term Policy?

Often, yes, but read the details before you buy.

Renewal. The NAIC says term policies may let coverage continue at the end of the term even if your health has changed. But if you renew, the premium may be more than the original policy. The NAIC suggests you ask what the premiums will be before you renew, and whether you lose the option to renew at a certain age. If the policy is non-renewable, you'll need to apply for new coverage when the term ends.

Conversion. Convertibility lets you exchange a term policy for a permanent policy without a medical exam or health questions. According to the Texas Department of Insurance, companies usually allow conversion only for a time, typically until you turn 65. New York's Department of Financial Services notes that the premium on conversion is usually based on your age at the time you convert, and that you must use the option during the conversion period.

How Much Does Term Life Insurance Cost Compared With Permanent Coverage?

There's no single price, because premiums depend on the policy and on you. Regulators do describe how term pricing behaves:

• Term premiums are lower at younger ages than premiums for permanent insurance, but term rates rise as you grow older (New York DFS).
• Policies are sold with different premium guarantees. The longer the guarantee, the higher the starting premium (New York DFS).
• Most companies offer term life insurance only up to a certain age, usually 70 or 80 (Texas Department of Insurance).

As a rule, term policies offer a death benefit with no savings element or cash value, which is part of why the NAIC describes term as designed to provide lower-cost coverage for a specific period. To choose an amount, compare your family's income, debts and expenses with what you already have, including coverage through work.

What Should You Check Before Buying Term Life Insurance?

• Confirm the license. Make sure the agent and company are licensed in your state. The Texas Department of Insurance warns that if you buy from an unlicensed company, your beneficiary might not get paid if the company fails.
• Ask about renewal and conversion, including the age limits and how premiums change.
• Know your workplace coverage. Most group life insurance is term life, and coverage you get through an employer typically ends when you leave the job (Texas Department of Insurance).
• Use the free-look period. Your state may give you a set number of days after you buy to review the policy and cancel for a full refund. Texas policies, for example, have a free-look period of at least 10 to 20 days. The California Department of Insurance suggests discussing the free-look period with your agent or insurer before you buy.
• Think twice before replacing a policy. The Texas Department of Insurance notes that replacing a policy isn't always a good idea, and the two-year contestable period begins again under the new policy.

Veterans and people leaving the military can find government term coverage in our guide to VA life insurance, which explains VGLI.

Is the Death Benefit From Term Life Insurance Taxable?

Usually not for income tax. The IRS says life insurance proceeds you receive as a beneficiary because of the insured person's death generally aren't included in gross income, and you don't have to report them. Any interest you receive on the proceeds, however, is taxable and should be reported as interest.

The Bottom Line

Term life insurance gives your family a set amount of money if you die during a period you choose. It has no cash value, so if you outlive the term, the coverage simply ends. Before you buy, decide how long you need coverage, ask how renewal and conversion work, and confirm the agent and company are licensed in your state. To size your policy, see how much life insurance you need. For lifelong options, see term vs. whole life insurance. Find more in our insurance guides.

Frequently asked questions

What is term life insurance in simple terms?

It's life insurance for a set number of years. You pay premiums, and if you die during the term, the policy pays a lump sum called a death benefit to the people you named. If the term ends and you're still living, the coverage stops.

What happens when a term life insurance policy ends?

The coverage ends unless you pay to extend it. If the policy is renewable, you can continue for another term, usually at a higher premium. If it's convertible, you may be able to switch to a permanent policy during the conversion period. If you outlive the term, no benefit is paid.

Do you get money back at the end of a term life policy?

Not with a standard policy. As a rule, term policies offer a death benefit with no savings element or cash value, and no benefit is payable if you live beyond the term, according to New York's Department of Financial Services.

Is a term life insurance payout taxable?

Generally not. The IRS says life insurance proceeds you receive as a beneficiary because of the insured person's death generally aren't included in gross income and don't have to be reported. Any interest you receive on the proceeds is taxable.

Can you buy term life insurance at any age?

Not always. The Texas Department of Insurance says most companies offer term life insurance only up to a certain age, usually 70 or 80.

Sources

1. NAIC: What Type of Life Insurance Is Right for You?
2. New York Department of Financial Services: Types of Life Insurance Policies
3. Texas Department of Insurance: Life Insurance Guide
4. California Department of Insurance: Life Insurance Guide
5. IRS: Life Insurance & Disability Insurance Proceeds

This guide is general information, not personal advice. Your situation may differ, so consider talking with a qualified professional, such as a fiduciary financial adviser, CPA or licensed agent, before making a decision.