Term life insurance is similar to renting an apartment.
When you rent, you have a lease for a certain term. When that lease is over, you can renew — but most likely with a rent increase. Likewise, term insurance lasts for a specified period, and when it’s up you can reapply for coverage, but the premiums most likely will go up as you age and your health deteriorates.
What is life insurance?
Life insurance is a contract between you and the life insurance company where you pay premiums (monthly or annually) for a payout that your living relatives will receive, known as the death benefit. Should you die, the insurance company pays the death benefit to your chosen beneficiary.
“If you don’t make it home and someone relies on your income to live, you need life insurance,” Mark Williams, CEO of Brokers International, told Insider.
Most people get life insurance to cover the mortgage, education, and other expenses so their family can continue after they die. The goal of having life insurance is to ease the burden on your loved ones after your loss.
There are two types of life insurance: permanent life and term life.
How term life insurance works
Unlike permanent life insurance which lasts your lifetime, term life insurance covers a 10, 20, or 30-year period. If you die during that period, your beneficiaries get your payout — known as the death benefit. Term life insurance is generally recommended for any adult with a dependent.
The biggest draw of term life insurance policies is the low monthly payments, which are determined by the insurance company after evaluating a person’s age, gender, health, and sometimes driving record, job, hobbies, and whether or not a person smokes. Oftentimes, you’ll need to submit to a medical exam.
There are four steps to purchasing term life insurance:
1. Apply: Online or with an agent, which may include a medical exam
2. Choose a term: Usually 10, 20, 30 years
3. Decide a death benefit amount: Ten times your annual salary is a rule of thumb, however you don’t have to stick to it
4. Name a beneficiary: You can name one person, or multiple people, to get the payout if you die
How long of a term should I choose?
According to Guardian Life, a good rule of thumb is to choose a term long enough to see your children out of the house and through college. You’ll pay more monthly for a longer term, but it is better to be cautious because you don’t know what the future holds. Also, it is usually easier to get insurance when you are young and in good health.
How much should I select for the death benefit?
When selecting your death benefit amount, you typically select 10 times your annual income. For example, if you make $75,000 per year, then you would purchase a life insurance policy for $750,000.
However, you aren’t tied to that number. You might want more if you want to pay for your kids’ college, or pay off your family’s mortgage, for example.
Generally, you’ll probably want to get as much life insurance as you can comfortably afford each month. If it would be a struggle to make your premium payments, it’s probably too much for you.
Who should I select as a beneficiary?
After selecting a death benefit amount, you select the beneficiary of your life insurance policy. A beneficiary is the person you select to receive the death benefit — you can pick multiple people, a trust you’ve set up, or a charity, according to the Insurance Information Institute.
Most couples select their spouse, partner, or trust created for a child as the beneficiary of their life insurance policy.
After completing these steps and being approved by the insurer, you’ll get your monthly payment amount. From there, you’ll start paying for your policy and have your coverage in place.
Types of term life policies
There are several types of term life policies, and some are more popular and expensive than others. Below is a list of the top term life policies.
| Types of Term Life Insurance | Definition |
| Level Premium | This is the most popular type of term life insurance |
| Annual Renewal (ART) | Policy is “renewable” at the end of the year |
| Return of Premium | Returns part or all of the money you’ve already paid if you haven’t used the policy once your term ends |
| Convertible | Allows you to convert a term life policy into a permanent life insurance |
| Group Life | Employer-provided life insurance and is usually offered for free |
| Guaranteed Issue | No medical exam and for those 50 years old and older. Coverage up to $25,000 |
| Simplified Issue | No medical exam, but you still have to complete a health questionnaire. Coverage up to $100,000 |
| Final Expense (aka “burial”) | A type of guaranteed issue policy with a low death benefit that covers funeral and burial expenses |
According to ColonialPenn, there is usually a two-year waiting period for guaranteed issue life insurance, meaning that if the policyholder dies within the first two years of having coverage, the policy won’t pay out.
Most employers offer some sort of group life insurance. However, your employer coverage may not be enough if it’s not 10 times your salary. Additionally, if you leave your job, you lose your coverage.
Ronda is an attorney, writer, and entrepreneur. She is a contributing writer for the Huffington Post. Originally from Chicago, she has lived in Los Angeles and New York. She loves to travel and is passionate about education equity, especially for first generation college students.