A term life policy pays your beneficiaries a set amount if you die during a specific period
A term life insurance policy is a contract between you and an insurance company. You pay a monthly or annual premium. If you die while the policy is active, the insurance company pays a lump sum—called the death benefit—to whoever you name as your beneficiary. The policy covers a fixed number of years, called the term. Common terms are 10, 20, or 30 years. If you outlive the term, the policy expires and no benefit is paid.
Term life is straightforward because it does only one thing: it replaces income or covers expenses if you die. It does not build cash value, does not have an investment component, and does not pay out if you survive the term. That simplicity is why it costs less than other types of life insurance.
Key Takeaways
- You choose the death benefit amount (often $250,000 to $1 million) and the term length (typically 10, 20, or 30 years) when you buy the policy.
- Your monthly premium depends on your age, health, the death benefit amount, and the term length—younger and healthier people pay less.
- The death benefit is paid to your named beneficiary tax-free if you die during the term.
- If you survive the term, the policy ends and you receive nothing, but you can renew or buy a new policy.
How the death benefit and term length work together
When you buy a term policy, you decide two main things: how much money your beneficiary will receive (the death benefit) and how long you want the policy to last (the term). A typical death benefit ranges from $250,000 to $1 million, though you can choose less or more depending on what your family would need. A typical term is 10, 20, or 30 years.
The term you choose should match when you need the protection most. If you have young children and a mortgage, a 30-year term might make sense because it covers you until your kids are grown and your house is paid off. If you only need to cover a specific debt or bridge to retirement, a shorter term like 10 or 20 years may be enough. Once the term ends, the policy stops—there is no payout, and you are no longer covered unless you buy a new policy.
What affects your monthly premium
Your premium is the amount you pay each month or year to keep the policy active. Several factors determine what you pay. Your age is the biggest one: a 30-year-old pays much less than a 55-year-old for the same coverage. Your health matters too—if you have high blood pressure, diabetes, or a history of serious illness, your premium will be higher. Smokers pay significantly more than non-smokers.
The death benefit amount and term length also affect the price. A $1 million benefit costs more than a $500,000 benefit. A 30-year term costs more than a 10-year term because the insurance company takes on more risk. Some insurers also consider your occupation and lifestyle—dangerous jobs or hobbies can raise the cost. Once you lock in a rate, it typically stays the same for the entire term, so you know exactly what you will pay each month.
The difference between term and permanent life insurance
Term life and permanent life insurance serve different purposes. Term life covers you for a set period and costs less because it has no cash value. Permanent life insurance—which includes whole life and universal life—lasts your entire lifetime and builds cash value over time, which you can borrow against or withdraw. Permanent policies cost much more per month because the insurance company expects to pay a benefit eventually.
Most people choose term life when they need to cover specific expenses or replace income for a limited time. Permanent life makes sense if you want lifelong coverage or have an estate that will owe taxes when you die. For young families on a budget, term life is usually the better fit because it provides substantial protection at an affordable price.
How to name a beneficiary and what happens when you die
When you buy a term policy, you name one or more beneficiaries—the people or organizations who will receive the death benefit. You can name your spouse, children, a trust, or anyone else. You can also name a primary beneficiary and a contingent beneficiary (who receives the money if the primary beneficiary dies before you do). You can change your beneficiary at any time by contacting your insurance company.
If you die during the term, your beneficiary contacts the insurance company and submits a death certificate. The insurer verifies the claim and pays the death benefit directly to your beneficiary, usually within a few weeks. The payment is not subject to federal income tax, so your beneficiary receives the full amount. If you die after the term expires, no benefit is paid because the policy is no longer active.
What happens when your term ends
When your term expires, you have a few options. You can let the policy lapse, meaning you are no longer covered. You can renew the policy for another term, though your new premium will be based on your current age and health, so it will be higher. Some policies include a conversion option, which lets you convert to a permanent policy without a new health exam—useful if your health has declined.
You can also buy a new term policy from any insurance company. If your health is still good, a new policy from a different insurer might be cheaper than renewing your old one. The key is not to let a lapse in coverage happen unintentionally—if you still need life insurance, decide before your term ends whether to renew, convert, or buy new coverage.
Common reasons people buy term life insurance
People buy term life for many practical reasons. Parents with young children often buy it to replace their income if they die, so the family can pay the mortgage, cover childcare, and keep the household running. People with significant debt—a mortgage, student loans, or a business loan—buy it so the debt does not fall on their family. Some people buy it to cover final expenses like a funeral, which can cost $10,000 or more.
Business owners sometimes buy term life on themselves or their partners to fund a buy-sell agreement, which lets the surviving owner buy out the deceased owner's share from the family. Others buy it as a bridge to retirement, knowing they will not need the coverage once they stop working and their kids are independent. The common thread is that term life covers a specific financial need for a specific period of time.
Frequently Asked Questions
Can I get term life insurance if I have a health condition?
Yes, but your premium will be higher. Insurance companies assess your risk based on your health history. Conditions like diabetes, high blood pressure, or high cholesterol will increase your cost, but they usually do not disqualify you. Serious conditions like cancer or heart disease may make coverage harder to find or more expensive. Some insurers specialize in coverage for people with health issues.
What happens if I stop paying my premium?
Your policy will lapse, meaning you are no longer covered. Most insurers give you a grace period—usually 30 days—to pay a missed premium before the policy ends. If you do not pay within that window, the policy terminates and you lose coverage. You can reinstate a lapsed policy within a certain time frame (often one to three years) by paying back premiums and sometimes undergoing a new health exam.
Can I borrow money against my term life policy?
No. Term life policies have no cash value, so there is nothing to borrow against. Only permanent life insurance policies (whole life and universal life) build cash value that you can borrow against. If you need money, you would have to surrender the policy and lose coverage, or buy a different type of insurance.
Is the death benefit taxable?
No. Life insurance death benefits are not subject to federal income tax. Your beneficiary receives the full amount tax-free. The only exception is if the policy is part of a large estate that owes federal estate taxes, but that applies only to very large estates and is a separate issue from income tax.
Can I buy term life insurance for someone else?
You can buy a policy on someone else, but you must have an insurable interest—a financial relationship where you would suffer a loss if they died. You can insure your spouse or children because you depend on their income or would face expenses if they died. You cannot insure a stranger or someone you have no financial connection to.