What Is Term Life Insurance, and How Is It Different From Whole Life?

Short answer: Term life insurance covers you for a set period of time, such as 10, 20 or 30 years. If you die during that term, the policy pays a death benefit to the person you named. If you’re still living when the term ends, coverage stops unless you renew or convert it. Whole life, by contrast, is designed to last your entire life and builds cash value, which is why it costs more.

What does term life insurance mean?

The Texas Department of Insurance (TDI) puts it simply: “Term life insurance offers protection for a set period of time.” The National Association of Insurance Commissioners (NAIC) says term “is intended to provide lower cost coverage for a specific period of time.”

In practice, you choose three things when you buy:

• The death benefit, the amount the policy pays.
• The term, how many years the coverage lasts.
• The beneficiary, who receives the money.

You pay premiums to keep the policy in force. If you die during the term, your beneficiary files a claim and receives the benefit. If the term ends and you haven’t died, the policy simply ends. You don’t get the premiums back unless you bought a policy designed to return them (more on that below).

How long does term life insurance last?

You pick the length. TDI says “the term can be for one year, or anywhere from five to 30 years or longer.” Many people match the term to a goal. TDI notes that term policies “aren’t meant to provide coverage for your entire life,” and that people often want coverage for a stretch of years, such as while raising kids.

There are also age limits. According to TDI, “most companies offer term life insurance only up to a certain age, usually 70 or 80.” Exact limits vary by insurance company and state.

What is level term vs. decreasing term?

The New York State Department of Financial Services (DFS) describes two main designs:

• Level term. “Under a level term policy the face amount of the policy remains the same for the entire period.” This is the most common kind people mean when they search for term life.
• Decreasing term. “With decreasing term the face amount reduces over the period.” The benefit shrinks over time, which is why decreasing term is often sold as mortgage protection. See what mortgage protection insurance is for how that works.

DFS also notes that with term, “premiums are locked in for the specified period of time under the policy terms.”

What happens when term life insurance ends?

You typically have a few options, depending on what your policy allows.

Renew it. The NAIC says “most term life insurance coverage can be continued (‘renewed’) at the end of the term, even if your health has changed.” The catch: “If you renew a term policy, the new premiums are higher.” TDI explains that renewal premiums go up because they’re based on your age at renewal. The NAIC suggests asking what the premiums will be before you renew, and whether you’ll “lose the right to renew the policy at a certain age.”

Convert it. Many term policies are convertible. TDI says “convertibility lets you exchange your term policy for a permanent life policy without having to take a medical exam.” TDI adds that companies usually allow conversion “only for a time, typically until you turn 65,” and that converting raises your premiums.

Let it end. If you no longer need coverage, you can let it lapse. A nonrenewable policy, the NAIC notes, “can’t be continued. You’ll have to apply for a new policy if you still want coverage.”

What about return of premium? Some insurance companies sell term policies or riders that refund some or all of the premiums if you outlive the term. These typically cost more than a standard term policy, and the rules vary by insurance company and state, so ask an agent to explain exactly what gets refunded and when.

Term life vs. whole life vs. universal life: what’s the difference?

Term is temporary coverage. Whole life and universal life are permanent coverage. The NAIC says permanent policies “include both a death benefit and, in some cases, cash savings,” and “because of the savings element, premiums tend to be higher.”

A few details from the regulators:

• Whole life. TDI says it “stays in effect for your entire life unless you cash the policy in or stop paying premiums.” Some whole life policies pay dividends, but TDI warns that “dividends aren’t guaranteed.”
• Universal life. TDI calls it “more flexible than whole life,” but notes that “if the cash value reaches zero, your policy could lapse.”
• Cash value. The NAIC cautions that if you take cash value out, “there may not be enough to pay premiums,” and unpaid loans plus interest are subtracted from the death benefit.

What are the pros and cons of term vs. whole life?

Term’s main advantage is price. The NAIC says “term insurance generally has lower premiums in the early years.” That can make it easier to buy a larger death benefit while your family’s needs are greatest.

Term’s main drawback is that it ends. If you still need coverage later, renewing costs more, and a new policy depends on your age and health at that time.

Whole life’s advantage is that it can last for life with premiums that usually don’t change, and it builds cash value. The NAIC notes that “if you want coverage for a longer period of time, such as for your lifetime, cash value insurance may be more cost effective.”

Whole life’s drawback is a higher premium for the same death benefit, at least at the start.

Who is term life insurance a good fit for?

Term tends to suit people with needs that have an end date:

• Replacing income while a spouse or children depend on your paycheck.
• Covering a mortgage or other large debt until it’s paid off. If you’re weighing a policy sold specifically for this, read mortgage protection vs. term life insurance.
• Raising kids, with coverage that lasts until they’re grown.

Permanent coverage may fit better if you want a policy that lasts for life. If you’re older and your main goal is covering funeral costs and final bills, a smaller whole life policy may be the better tool. See what final expense insurance is.

How do you choose a term length and coverage amount?

TDI says to consider your debts, the income your family would need to replace, and their expected bills, and to “think about how much you’ll need to help your dependents after your death.” This checklist can help:

1. Add up your debts, including the mortgage balance, car loans and credit cards.
2. Estimate the income to replace. Think about how many years your family would rely on your earnings.
3. List future costs, such as child care or education.
4. Subtract what you already have, including savings and any existing life insurance.
5. Pick a term that covers your longest need, such as the years left on your mortgage or until your youngest child is grown. TDI notes that buying a longer term can help you avoid higher renewal premiums later.
6. Check the renewal and conversion terms. Ask until what age you can renew or convert, and what renewal premiums would be.
7. Make sure the premium fits your budget. The NAIC advises, “Before you buy a life insurance policy, be sure you can pay the premiums.”
8. Answer health questions truthfully. The NAIC says “it’s important to tell the truth on the application.”

A licensed agent can walk you through these trade-offs for your age, health and state. Here’s how calling RestAssured works.

Is life insurance through work enough?

It may not be. TDI says “most group life insurance is term life,” and that a basic group policy through your job “usually has a death benefit equal to one or two times your annual salary.” That can be less than your family would need.

Group coverage also depends on your job. TDI says that “coverage typically ends when you leave your job.” An individual term policy stays with you regardless of where you work, as long as you pay the premiums. Also, the NAIC advises: “Don’t cancel your current policy until you get the new one.”

RestAssured is a brand of All Phone Leads, Inc. RestAssured is not an insurance company or an insurance agency and isn’t affiliated with any government agency. RestAssured connects callers with independently licensed insurance agents.

Frequently asked questions

What is term life insurance?

Term life insurance is coverage for a set period of time. If you die during the term, the policy pays the death benefit to your beneficiary. If the term ends while you’re living, coverage stops unless you renew or convert it.

What's the difference between whole life insurance and term life insurance?

Term life covers a set number of years and generally has no cash value, so it usually costs less at first. Whole life is designed to last your entire life, builds cash value, and has higher premiums that usually don’t go up.

How long does term life insurance last?

The Texas Department of Insurance says a term can be one year or anywhere from five to 30 years or longer. You choose the length when you buy the policy.

At what age does term life insurance end?

It ends when the term you chose runs out, unless you renew it. The Texas Department of Insurance says most companies offer term life only up to a certain age, usually 70 or 80, and some policies lose the right to renew at a certain age.

What is level term life insurance?

With level term, the death benefit stays the same for the whole term. With decreasing term, the benefit gets smaller over time, which is why it’s often sold as mortgage protection.

Sources

• Life Insurance Buyer's Guide, National Association of Insurance Commissioners
• Life insurance, NAIC consumer page
• Life insurance guide, Texas Department of Insurance
• Types of life insurance policies, New York State Department of Financial Services

This article is for general education. Policy features, prices and eligibility vary by insurance company and state; your agent will explain the specific terms of any policy before you apply.