Term life insurance

Life insurance that pays a set death benefit if the insured person dies within a fixed period, such as 10, 20 or 30 years, with no cash value.

What it means

Term life insurance covers a specific number of years. If the insured dies during the term, beneficiaries receive the death benefit, generally free of income tax. If the term ends first, coverage stops and nothing is paid. Premiums on level term policies stay the same for the full term.

Because it offers pure protection without a savings component, term life is typically far cheaper than permanent coverage for the same death benefit. Premiums depend on age, health and the term length. Some policies can be renewed or converted to permanent insurance, usually at higher cost.

Example

Suppose a 35-year-old parent buys a 20-year, $500,000 policy so that a mortgage and child-rearing costs would be covered if they died before the children grow up. If they die at 50, the family receives $500,000; if they outlive the term, the policy simply expires.

How it’s used

Protecting dependents during working years
Covering a mortgage or other debts
Replacing income for a family

Strengths and weaknesses

Strengths

Much lower premiums than permanent life insurance
Simple to understand and compare
Coverage can be matched to years of greatest need

Weaknesses

No cash value or payout if the insured outlives the term
Renewing later can be costly or require new health questions
Premiums rise sharply with age at purchase

Good to know

Laddering several policies with different terms can lower coverage as debts and dependents shrink.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.