Term Life Insurance

Term life insurance is a policy where you choose the length of coverage, such as 10, 15, 20 or 30 years. If you die within that term, your beneficiary will receive the death benefit. If you outlive the term and don’t renew the policy (at a higher cost), there is no death benefit.

Term life insurance is good for folks who want to cover a specific financial concern, such as income replacement during your working years.

You want to protect your family from the financial problems they'll face if you're not there to provide for them. You need life insurance, but how much? Is term life insurance the right choice? What do you need to know before buying? In just a few minutes, we can help answer those questions. To get a better feel for how term life insurance works, you can start by using our calculator to get a no-commitment quote for a 20 year term life policy. In about a minute, you'll see an estimated coverage amount and cost per month. Or, just read on to learn more about term life.

How term life insurance works

A term life insurance policy is an agreement between you and a life insurance company: You agree to pay a premium for a specific period of time (usually between 10 and 30 years); in return, there is a guaranteed death benefit that the company promises to pay to your beneficiaries (typically your family). The death benefit is almost always paid out in an income tax-free lump sum of cash.

Term life insurance is simpler and typically more affordable than permanent life insurance, such as a whole life insurance policy that provides life-long protection. Whole life policies have an added "cash value" component that can build up a valuable tax-deferred asset – money you can use during your lifetime. A term life policy has no cash value component: once the life insurance term is over, there's no value or payout to your family.

The pros and cons of term life

Advantages

Affordable form of coverage
Provides coverage while it's needed most
Highest death benefit amount per premium dollar
Affordable for young, healthy policyholders

Disadvantages

No cash value component
Coverage is not permanent
Once the term expires, there's no payout
Typically more expensive to renew when you get older

Overall Term life insurance may cost less than you think.

Factors that affect the cost of a policy

As you can see, the average woman pays less for coverage than the average man. That's because women tend to live longer, and life expectancy has an understandable impact on the cost of coverage. In addition to gender, here are some other factors that affect the price of term life premiums – and why:

Coverage amount

The bigger the death benefit, the higher the cost. While this may seem obvious, you should also know that a bigger policy can be cost-effective: if you double the death benefit, your premiums don't typically double.

Term length

The longer the term, the more you'll pay per month. The more years you need life insurance, the higher the likelihood that the insurance company will have to make a payout to your family. However, you'll pay less for a 20-year term life policy than two consecutive 10-year policies.

Age

The older you are, the higher the cost. The older you get, the lower your life expectancy – so you pay more for a given amount of coverage.

Health status

The better your health, the lower your cost. Most policies are medically underwritten, which means you have to answer health questions and get a medical exam. "Guaranteed acceptance" policies don't ask about your health, but they cost more because the insurance company must assume you have health issues.

Lifestyle

Tobacco use and other hazardous activities raise your cost. Smoking and certain activities such as scuba diving increase the likelihood of a death benefit payout. However, if you quit smoking, you may qualify for lower rates after a year.

Optional riders

Additional policy features can affect cost. Riders can enhance the value of the policy by adding flexibility and extra financial protection. Some add to the cost of a policy, but others may not.

Different ways to think about how much coverage you need

"How much insurance do I need?" is a common question. The answer depends mostly on where you are in life and how many family members rely on your income. In general, the younger you are, the more coverage you'll need to compensate for the years of potential wage-earning ahead of you. And the more family members depend on you, the more coverage you'll want for income replacement if you die.

Our calculator uses Human Life Value to help determine coverage assumptions based on what you're earning now and what you expect to earn for your family in the future.7 If you're between the ages of 18 and 40, you multiply your current income by 30; as you get older and have fewer working years left, that multiple decreases. It's a rough estimation method, but there are others, such as the DIME method, which looks at your Debts, Income, Mortgage obligations, and Education goals for any children in your family.

Find out more about other ways to calculate your life insurance need, or speak with one of our financial professionals for a more personalized analysis of your needs.

10, 20, or 30 years?

How to choose a term length?

One of the biggest questions people have about term life insurance policies is, "How long do I need coverage?" If you have children, a popular rule of thumb is to choose a term long enough to see them out of the house and through college. As noted, the longer the term, the more insurance policies cost. Nevertheless, it usually pays to err on the side of getting a longer term policy than a shorter one: A person at age 30 will pay less overall for a 20-year policy than they would for two consecutive 10-year policies – because when they renew, they'll have to pay the rates of a 40-year-old.

Most policies are "level term" – but there are other kinds as well

Other term options are also available, but you may have to shop around a bit more to find them:

Yearly renewable term – This type of insurance provides coverage for a year at a time, with an option to renew without a health exam for the duration of the term – but at a higher cost each year. Compared to a level premium policy, your payments will likely be lower at first, but over the long term (for example, 20 or 30 years), you will end up paying more as rates go up.
Return of premium – This type of policy actually pays back all or a portion of your premiums if you live to the end of the term. The downside is, your payments could be 2-4 times higher than with a regular term policy.
Decreasing term – This is typically purchased to pay off a large business loan or mortgage if the borrower dies, with a premium and benefit that decrease over time as the loan balance is paid off.
Guaranteed and simplified issued – These life insurance policies don't require a medical exam during the application process and only ask a few simple health questions at most. Premiums are higher because the insurance company must assume you're a risky prospect with health problems. These policies may have level premiums but typically have a small death benefit. They are usually sold to seniors for funeral and final expense coverage.

Not sure how long you need coverage?

You may be able to convert to permanent whole life insurance.

Many policies have a term conversion rider. This lets you convert your policy to a whole life insurance policy for a specified period without having to undergo a medical exam. This adds valuable flexibility by letting you get permanent coverage later on without going through the medical underwriting process. If your health takes a turn for the worse, conversion to a permanent policy may be the only viable way to provide the death benefit you want for your family.

When you convert to whole life insurance, your premiums will rise. However, your benefit amount is guaranteed for life, as long as your regular premiums are paid. The policy also earns additional cash value that can be used for things like policy loans. Policies from a mutual life insurance company may also provide dividends, helping you fund life's other financial opportunities.

With Level Term policies, a conversion privilege comes at no added cost. It lets you convert to whole life insurance at any time in the first five years. It also offers an Extended Conversion rider for a modest monthly increase in cost. This lets you convert a Guardian term policy to a whole life insurance policy for the entire duration of the term – as much as 30 years.

How to buy term life insurance?

Working with a financial professional

If you're not sure what kind of protection is best for you – term or permanent insurance coverage – consider working with a financial professional. He or she can provide insurance information about the options that fit your immediate needs and long-term goals. If you have a financial professional you trust, ask them how much life insurance and what type of policy you should have. Otherwise, Guardian can connect with a financial representative who will listen to your needs, tell you about the best ways to meet those needs within your budget, then help you decide.

Which is better, term or whole life insurance?

Either type of insurance provides meaningful protection and can be a good option depending on your needs. Term life insurance offers protection that lasts for (typically) a 10 to 30 year period. It is the more affordable option. Whole life insurance is permanent coverage that lasts your entire life, provided you make premium payments. Like other permanent life insurance products, a whole life insurance policy has an extra cash value component. Over time, the value of the policy can build up to become a valuable, tax-deferred asset that can be used in various ways during your lifetime.

What happens if I outlive my term life insurance?

Term policies provide temporary life insurance protection for a specific period of time. If you outlive your policy term, life insurance coverage lapses. There is no residual cash value, and your beneficiaries will no longer get a payout if you pass away. You can apply for a new policy, but rates will be higher because you are older. If you don't like the idea of paying premiums for 20 years or more with no return, consider getting a permanent policy such as whole life insurance. As long as premiums are paid, the whole life policy will not expire, and it will earn additional cash value that can be used for things like policy loans.

What is the cost of a $500,000 term life insurance policy?

Term policies can be more affordable than you might think. A female, age 30, who doesn't use tobacco can get a $500,000 20-year term policy from Guardian for just $27 a month. The same coverage amount in a 10-year term policy is even more affordable: only $20 per month.

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

Most term life policies have no face value once the term ends. The exception: A "return of premium" policy that pays back all or a portion of your premiums if you live to the end of the term. However, premiums for this type of policy can be 2-4 times higher than a regular term policy.

At what age should I buy life insurance?

You may think that life insurance is only for recent parents or mid-aged people. But young adults are in the best position to purchase a life insurance policy. When you're young, the cost is typically lower than it will be later on, so you can lock in a much better deal.

Whole life vs universal life insurance.

What are the key similarities and differences?

Life insurance fills a unique role: when you’re no longer able to be there for your loved ones, the life insurance company will deliver a tax-free check to your beneficiaries. While this money can never replace you, it can help them live the kind of life you hoped to provide.

What are the major types of life insurance?

All life insurance can give you financial confidence that your family will have financial stability in your absence. There are several different types of life insurance, however, and it’s important to understand the benefits of each type based on your needs and how they compare.

Term life insurance: how does it work?

The least complex form of life insurance is called term. A term life insurance policy simply provides coverage for a set period of time (e.g., a term you choose), for whatever benefit amount you select. When that period is over, usually 10-30 years, so is the coverage. For many, term insurance can be an economical and temporary form of financial reassurance. Coverage can sometimes be renewed after the initial term period expires, although typically at a much higher cost, and in most cases, after a new required medical exam. Term insurance does not have any component of building a lasting financial asset, but it does provide a level of coverage until the term expires.

Permanent life insurance: what is it and how does it differ from term?

The other primary type of life insurance policy is called permanent life insurance. Here, life insurance coverage stays with you as long as you’re alive, and as long as your payments stay current. Your beneficiaries, whether loved ones or a designated charity, will receive a sum of money when you pass away, no matter when that occurs. Within the permanent life insurance category, there are two main variations: whole life insurance and universal life insurance.

How do whole life insurance policies and universal life insurance policies compare?

Both permanent products are life insurance policies that can last your whole life, and in addition to the insurance coverage, both can build a cash value,1 which is money that you can use during your lifetime.2 You can’t outlive the guaranteed life insurance protection,3 provided that you keep the policy in good shape by making sure that your payments are up to date. A portion of each premium (the amount you pay for your policy) goes towards building your cash value component.

Aside from these similarities, whole life and universal life have several differences. One variety might suit a different type of person better than the other, and ideally, you would consult with a qualified financial professional to figure out which is more in line with your needs. Here, we list a few considerations.

What are the key differences between whole life insurance and universal life insurance when it comes to cost?

Whole life costs a guaranteed level amount of money each month

In general, a whole life insurance policy is best suited to the type of person who wants guarantees. A whole life insurance policy tends to cost more in the early years to support the guarantees it provides.

You’re buying a financial product that will provide an immediate death benefit and start building up into a permanent asset — and this comes along with several guarantees. These include guaranteed level premium payments, meaning that the payments you make each month (or year, if you prefer) won’t ever rise. As the cost of living goes up throughout the years ahead, you can be certain that your whole life insurance premium will remain identical every month and will never cost more.

Whole life cash values are guaranteed

In addition to this guaranteed premium, whole life also provides guaranteed cash value. As these values build throughout the course of the policy, a loan or withdrawal may be taken to cover future premiums, meaning your whole life policy could even become a self-financing asset. Although not guaranteed, you may also receive annual dividend payments from the insurance company if it’s a mutual insurance company. Those dividends can boost the cash value asset even further.3

Also, the cash value growth within the policy isn’t taxed as income. The combined package — guaranteed death benefit for your loved ones whenever you pass away, and cash value that grows in a tax-advantaged way — gives you flexibility to handle life’s unexpected events. Always keep in mind that accessing the policy’s cash value may affect how much your beneficiaries receive after you’re gone.

The cash value you build with whole life insurance is a financial asset, and one you can access and use during your lifetime. You can borrow and/or withdraw from it to supplement retirement income, help offset college tuition costs, use it as collateral for a loan and much more. Your cash value will grow at an interest rate guaranteed from the insurance company, with potential additional growth provided by a non-guaranteed dividend.

Universal life cash values and premiums can fluctuate

In a universal life insurance policy, the cash value growth is dependent upon the current interest rates associated with the specific type of policy. Universal life policies will all see different growth patterns. How much premium you pay into the policy and how much you tap into the cash value will also play a role in the overall growth.

There is some risk associated with universal life because interest crediting rates, cost of insurance rates, and investment performance can change and will impact your policy. It’s important to consider coverage with a company that offers a guaranteed interest rate. Speak with a financial professional to learn more.

If a universal life policy is underfunded — meaning the amount of premiums paid in are less than the current charges, the difference is then deducted from the cash value. Depending upon your specific contract, if the cash value falls to a certain point, your policy can lapse.

You should stay in touch with your financial professional to make certain that you keep the account, and your life insurance coverage, in healthy condition.

How do they differ when it comes to dividends?

Whole life potentially provides dividends

If you buy a whole life insurance policy from a mutual insurance company, you may receive annual dividend payments on your policy. These depend upon the profitability of the insurance company that particular year and are not guaranteed. However, some mutual companies have track records of delivering dividend payments virtually every year with policyholders. Dividends can be reinvested into your policy to help build cash value faster. Over time, this can help grow your cash value account.

Another financial tactic is to use dividend payments to buy additional insurance and increase the total “death benefit” (the amount of money that will be payable to your loved ones).5

You may also use dividends and the additional coverage they purchase to pay all or a portion of your future premiums. Other options are to receive the dividends in cash each year or accumulate them within the policy and withdraw them at a future date.

Note that loans and withdrawals from the policy can reduce the amount of money you will eventually leave to your beneficiaries.

Universal life does not benefit from dividend payments

While universal life does enable you to benefit from interest rates when they’re working in your favor (and lose value when they’re not), in general, you do not receive dividend payments from the insurance company.

How do they compare when it comes to premiums?

The money you pay-in every month to purchase your life insurance coverage is called your premium. In a whole life policy, this premium is a fixed payment of a set dollar amount. In a universal life insurance policy, you can raise or lower those payments as you see fit, within the limits of the policy.

Universal life provides more flexibility in payments

If you like choice, the universal life option allows you to adjust to your life circumstances. Having another child, or moving on to a different job, or one day taking out a loan to buy a business — all might be instances where a combination of protection and flexibility becomes important.

This type of policy might suit you if you’re envisioning significant income fluctuations or you think that you may want the ability to vary your payments.

Paying in less could eventually result in the need to pay higher premiums in later years to keep your coverage from lapsing. This option means that your premium payments could vary, providing flexibility to keep your policy in force your entire life.

Both whole and universal life insurance policies can be complex. Before deciding which type of life insurance policy is best for you, meet with a financial professional to check out the options and discuss what best fits your needs.