Definitive Guide on How to Buy Term Life (Comparisons & More)

When you’re young, the idea of buying insurance in near-unfathomable. It can be hard to wrap your head around the idea of paying money for a service that, if all goes well, you’ll never use.

However, over time, you gradually come to understand it’s importance, starting with car insurance as a teenager and graduating to health insurance as a young adult.

Despite that understanding, life insurance is one of the major forms of coverage often forgotten or neglected. That’s unfortunate because life insurance is one of the most important financial decisions you can make if you have a family that depends on you.

According to the 2018 Insurance Barometer Study from Life Happens and LIMRA, 35 percent of households would be financially impacted within one month of the primary wage earner’s death.

Still, almost half of all adults in the United States don’t have life insurance. Of those that do, 20 percent feel their coverage is insufficient to meet their financial needs.

If you’re reading this, you’ve likely already decided to buy a policy. Now you need to know how to do so.

Term life insurance is one of the simplest and most reliable forms of coverage you can buy. This guide is designed to give you a complete overview of the buying process, sample rates, and how to find the best provider.

If you haven’t decided on a type of coverage yet, or haven’t decided whether you should purchase life insurance at all, this guide provides plenty of information on term insurance as a whole, which can hopefully make your decision a little easier.

Start comparing life insurance rates now by using our FREE quote tool above!

What is term life insurance?

Life insurance policies fall into one of two general categories: term or whole.

Term insurance provides coverage for a specified period, usually between 10 and 30 years. Once that period expires, the insurer cancels the coverage unless you opt to renew or convert the policy.

Term policies are generally meant to cover final expenses and outstanding debts in the event of an unexpected death, as not to burden those left behind.

On the other hand, whole insurance (sometimes called permanent insurance) provides coverage for as long as you live with no set time limits.

As long as your premiums are current, the insurer will pay a guaranteed benefit upon your death, whenever that may be.

For example, if a 30-year-old woman buys a $100,000, 20-year term policy, that coverage ends at age 50. If she dies any time after age 50, the insurer won’t pay anything to her beneficiaries.

Think of it like buying an extended warranty on a new product.

You pay out of pocket for protection over a set period of time. Once that extended warranty expires, you don’t get the item replaced, despite the fact that you paid additional money for coverage.

On the other hand, imagine the same woman bought a whole policy instead. As long as her payments were current at her time of death, the insurer would pay her beneficiaries $100,000, regardless of how old she was.

It’s like paying every month for a lifetime warranty, rather than just an extended one.

Simply put, term policies are designed for those who want to plan for an unexpected death before they’ve paid their debts or set up their family with significant savings.

Whole policies are made for those who want to leave money behind no matter what their financial situation is or when they die.

Who should buy term life?

Term life insurance represents less of a financial risk to the insurer. There’s always the possibility that they won’t ever have to pay out on any given policy. In fact, that is their hope.

A whole policy is a greater risk because it has a guaranteed benefit. The insurer is eventually going to have to pay out on the policy, possibly before they’ve made enough profit on the premiums to cover the cost.

Insurers pass that risk onto the policyholder in the form of higher premiums.

A term policy will always cost less than a whole policy with the same face value.

Whole life insurance also comes with sometimes-complicated savings and investment components that add to the cost and might be more than the typical person needs out of a policy.

Because of that, many financial planners and consumer advocacy organizations, such as Consumer Reports, suggest that a term policy is a better choice for a majority of families.

Term policies are ideal for younger families on a budget because they offer large benefits for a low price.

They’re also a good choice for those who already have a solid savings/investment strategy they don’t want to be derailed by an unexpected death before those accounts mature to their desired value.

In short, term insurance is best for most people outside of very high-income families and those with unique financial considerations.

What Term Life Covers

Life insurance is generally used to cover two types of obligations: immediate and future.

Immediate obligations are the things that need to be paid soon after your death. These include:

• Funeral costs
• Medical bills
• Mortgage balances
• Personal loans
• Credit card debt

Future obligations are all of the expenses (either planned or unexpected) you want to pay for after your death. They include:

• Income replacement
• Spouse’s retirement
• Emergency savings fund
• Children’s college tuition

Average Cost of Term Life

As previously discussed, term coverage is among the cheapest form of life insurance. Premiums vary based on multiple demographic, health, and risk factors, but as a whole, coverage is very affordable.

Most people can get up to $500,000 worth of coverage for pennies a day.

Factors That Affect Rates

There is no industry-standard price for life insurance. Rates vary for everyone. Your personal premiums are determined by several factors, primarily the following:

• Age: Age is one of the most important factors in determining insurability. The older you are, the closer you are to death. Every year you wait to buy a policy can mean a higher premium.
• Gender: Statistically, men have a shorter life expectancy than women. Because of that, women typically pay lower premiums.
• Health History: Healthy people live longer. Longer life expectancy translates to lower premiums. To determine your overall health, insurers may require a complete medical exam and bloodwork.
• Family Medical History: Because many diseases are hereditary, most insurers will also examine the health history of your immediate family.
• Occupation: By nature, some jobs are more dangerous than others. The more dangerous the profession, the more likely an insurer is to pay out an early death benefit, which means higher premiums.
• High-Risk Habits: Insurers will inquire about high-risk habits such as mountain climbing, flying, or any other regular activity that has a high potential for injury or death.
• Tobacco Use: The most common high-risk habit that insurers look for is tobacco use. Smokers almost universally pay higher rates than their non-smoking counterparts in every demographic.

Once the insurer determines your rate based on these factors, it is typically fixed, meaning that it will not change for any reason over the life of the policy.

Some policies also come with a limited pay option. They allow you to pay for the policy in full over an initial limited period.

For example, you might pay a higher premium on a 20-year policy to pay the full balance in 10 years. Then you enjoy another 10 years of coverage without a monthly payment.

This can be beneficial for those with extra funds now, but who are unsure of what the future might hold. Perhaps you plan on having kids or buying a bigger home down the road and don’t want to have to worry about that extra expense.

Do rates change over time?

Premiums on term insurance can increase annually, depending on the type of policy you choose (discussed later in this guide).

For the most part, however, they don’t. The most common type of term insurance is level term insurance. Your premiums are guaranteed to stay the same for the entire policy term.

That said, you will likely see an increase if you renew your policy for a new term once the original one expires.

Sample Rates

To give you an idea of how much a life insurance policy will cost you, here is a breakdown of the combined average premium of the top 10 insurers by market share for a 20-year, $100,000 term policy for key demographics.

If you’re interested in a policy with a higher face value, here are some average monthly sample rates for the same providers.

These rates assume that the individual is a healthy non-smoker.

How much coverage do you need?

When it comes to term policies, the question of how much coverage you need is actually two questions:

• How large of a face value do I need?
• How long of a term do I need?

Here are some tips to help you find the answer to each.

Face Value

As previously discussed, a life insurance policy needs to cover two types of obligations: immediate and future.

If your family depends on your income, that future obligation needs to include as many years’ worth of salary as it will take for them to adjust to the new status quo.

If you’re unsure, a life insurance agent or financial planner can help you determine exactly how much coverage you’ll need to cover all of those obligations.

In the meantime, there are simple formulas you can use to give yourself a rough estimate.

One popular method used by many online insurance calculators is the DIME method. DIME is an acronym which stands for the following:

• D: Debt
• I: Income
• M: Mortgage
• E: Education

Adding up your total obligations in those four categories will give you the minimum face value you need.

Here is a simple example using the DIME method.

A wife and mother of two is the majority wage earner in her family, with a husband who works full time. She has an annual salary of $75,000.

The family has a remaining mortgage balance of $65,000 and a balance of $10,000 on a home improvement loan.

The mortgage is the largest annual expense. With it paid, the family will have less need for her income. Therefore, she plans to leave only five years’ worth of her salary for expenses and savings.

She would also like to leave their child $35,000 to cover the average cost of four years in-state tuition at a public university.

After factoring in an average funeral cost of around $7,500, her insurance needs are as follows:

• Immediate need: $65,000 mortgage + $10,000 loan + $7,500 funeral costs = $82,500
• Future need: $375,000 income replacement + $35,000 college fund = $410,000
• Total need: $492,500

That total means she should purchase a life insurance policy with a face value of around $500,000.

Term Length

In general, your life insurance term needs to cover the duration of your outstanding financial obligations.

For example, if you have 20 years left on a 30-year mortgage, you should choose a 20-year life insurance policy.

If you want to pay for your child’s college tuition and have a savings account set up that will take 10 years to reach the desired value, you should choose at least a 10-year policy.

The rule of thumb is to pick your longest financial obligation and choose a term length to match, along with a face value to cover it and all of the shorter obligations within that time frame.

Types of Term Life

All term life insurance follows the basic model of providing coverage for a limited amount of time. Within that general category, there are several variations:

• Level Term
• Increasing Term
• Decreasing Term
• Renewable Term
• Convertible Term
• Return of Premium

Each differs as follows.

Level Term

A level term policy is the simplest form of term insurance. The premiums never increase, and the amount of the death benefit remains the same throughout the entire term.

Term policies are typically sold in terms of 5-30 years, in five-year increments.

Some companies do offer single-year policies that renew annually.

While it’s true that the premium remains the same throughout the term, since each term is technically only one year, you could see annual rate increases with this type of policy.

Increasing Term

For an increasing term policy, the death benefit increases each year you have the policy within a certain limit, usually between 2-10 percent. As the death benefit goes up, so will your premium.

For example, a $100,000 increasing term policy might increase by 5 percent every year. So, in year one, the death benefit would be $105,000. In year two, it would be $110,250, and so on.

An increasing term policy might not be the best option for those who want long-term coverage.

For example, on a 30-year policy, the death benefit will have grown substantially after a few decades. That means that the premiums will have risen along with it.

At some point, those higher premiums will reduce the overall value of the policy. The premiums could even increase at a higher rate once the benefit crosses a certain threshold.

Decreasing Term

Decreasing term insurance is sometimes called mortgage protection insurance. The benefit decreases every year of the term.

The idea here is that you will be paying down the balance on whatever debt you intend the insurance to cover (usually a mortgage). As that balance shrinks, so does the amount of coverage you need.

The premiums don’t decrease with the benefit. Instead, decreasing policies offer a much lower premium from the start that you pay continually throughout the term.

Renewable Term

Renewable term policies allow you to extend or renew your policy for an additional term after the expiration date with no new medical exam.

Some renewable policies automatically renew every year up to a specific age (typically 65). Policies that renew annually usually see premiums increase each year, as well.

Other policies automatically renew for your original length once your policy term ends.

Convertible Term

A convertible term policy allows you to convert your term policy into a permanent policy with the same face value, usually without taking a new medical exam.

Converting from term to whole insurance will increase your premiums (as discussed earlier). Some insurers also place age limits on conversions. Typically, you must convert before age 65.

Return of Premium

For a majority of term life insurance policies, when your policy expires without being cashed in, the insurer doesn’t return any of the premiums you paid (just like any other form of insurance).

However, if you specifically purchase a return of premium policy (or add a return of premium rider to another term policy), the insurer will return your premiums at the end of the term.

To qualify, you must keep the policy in force for the entire term. You won’t get your premiums returned if you cancel the policy at any point.

Naturally, these policies have higher premiums than traditional term insurance.

Some policies will only return the base premium and keep the additional you paid for the return benefit. Others will return both.

Changing Your Policy

If your future financial situation changes during the life of your policy, you have some options for adjusting your coverage.

Renewing Term Life

You can renew many term insurance policies for additional terms once the original expires. Some will even allow you to do so without taking a new medical exam.

Every time you renew the policy, you run the risk of increased premiums since you’re starting a new term at an older, riskier age than when you originally applied.

Some insurers sell policies that renew at a guaranteed fixed rate, but those policies usually come with higher premiums from the start.

Most plans have an age limit on renewals, typically 65 years old.

Converting Term Life

There are a few situations when you might decide you need permanent coverage rather than temporary:

• Estate Planning: If you’re leaving behind a large estate, your heirs might be faced with a large tax bill. The current maximum estate tax rates are nearly 40 percent. Proceeds from life insurance policies are typically tax-free. Your beneficiaries can use the death benefit from a whole policy to pay the taxes.
• Asset Protection: If you need to protect your assets against liens and creditors, most consider the proceeds from a life insurance policy to be uncollectible assets.
• Establishing Long-Term Care: If you’re the primary caregiver for a spouse or loved one with special care needs, the proceeds from a whole life policy can be used to ensure they get the care they need long after you’re gone.

Many term life plans can be converted to whole life plans. Some can be converted at any point, while others must be converted during a certain period, such as within the first 10 years.

Like renewals, most insurers place an age limit on conversions.

Changing Your Death Benefit

A term policy you bought 10 years ago might not be sufficient for your current financial needs.

Any number of life events could have occurred during that time that would necessitate an increased face value, such as marriage, a new child, or a new home.

Some policies allow you to increase your coverage during a certain time period, while others let you change at any time. If you think you might need additional coverage, it’s better to do it early.

As discussed, premiums increase with age. If you wait until the back end of your term to increase your face value, it will be more expensive than if you did it closer to the beginning.

Buying Term Life

Because of their general simplicity, term life insurance policies are among the easiest to buy. You can do so in several ways: online, directly with the insurer, or through an independent agent.

Getting a Quote

You wouldn’t purchase a car without first looking at the sticker price, and the same is true of life insurance. Before you make a purchase decision, you need to know the cost of the policy.

There are two main ways to get quotes: online or through an agent.

Online

Whole life insurance has a lot of variations and more factors that influence its premiums. As such, many companies don’t give out quotes for them online.

On the other hand, term quotes are widely available.

Many insurers have quote tools on their website. You simply choose your desired coverage, enter some basic personal information, and the tool will return an estimated cost.

There are also independent quote tools (like the ones on this page) which will provide you with quotes from multiple insurers at once, allowing you to compare prices quickly.

Some insurers also sell direct term policies. After getting your quote, you can immediately apply for the policy online without ever having to talk to an agent.

Agents

A majority of life insurance policies are sold through agents, even if the insurer provides online quotes. Insurance agents fall into one of two categories: the independent agents or the captive agents.

An independent agent is free to shop and sell policies from multiple agencies to find the best policy for their clients.

A captive agent works for a single insurer, and will only market and sell their employer’s policies. Think of them more as customer service reps than actual insurance brokers.

One is not necessarily better than the other.

If you want to compare costs and policies across multiple insurers, you can only do so with an independent agent.

If you’ve already done the homework yourself and have decided on a specific insurer, the captive agent can help you choose the right policy and tailor it to your financial needs.

Most insurers have an agent finder tool on their websites. You enter some basic personal information, location, and type of coverage you want, and agents will contact you to discuss your options.

Unfortunately, not all company websites make it clear whether they are connecting you to a captive agent or an independent one.

If you know you want to see policies from multiple providers, you might be better off seeking out an independent life insurance agency on your own, rather than being directed to one by an insurer.

Medical Exams

When applying for term life, insurers will require you to fill out a health questionnaire and may request your medical records. Some will also require a complete medical exam and bloodwork.

The basic life insurance medical exam process looks like this:

• The customer fills out a life insurance application and medical questionnaire
• The insurer schedules an in-home medical exam
• The medical examiner conducts a brief oral interview
• The examiner measures height, weight, and vitals, then takes a urine sample, blood sample, and oral swab
• Lab results are sent to the underwriter for review
• The insurer will assign a risk classification and inform the applicant of final premiums

Some term life insurance policies advertise the fact that they don’t require a medical exam. That’s a big selling point for some, but it’s a benefit that might cost more in the long run.

A young, healthy person might not see much of a difference in rates between an exam and no-exam policy, but older people can expect to pay more.

A no-exam policy represents a greater risk to the insurer. They pass that risk along to you in the form of increased premiums.

Depending on your health, taking the exam could show the insurer that you’re a lower risk than they might assume you are with a no-exam policy.

Tips for Finding the Best Policy

Here are some important tips to remember as you shop for a term life insurance policy.

#1 – Buy from a Reputable Company

Make sure the company you’re buying from is reliable.

Start by researching their market share. If they have a significant presence in the industry, with a lot of policies written, then they’re more likely to be an established, respectable company.

From there, read company reviews that focus on policy offerings, financial stability, and reputation. You can also do your own research in those areas by using the following resources:

Third-party rating agencies like A.M. Best, the financial services company Moody’s, and Standard & Poor’s (S&P) measure an insurer’s financial strength and its ability to pay all of its policy obligations.

J.D. Power’s annual U.S. Life Insurance Study measures overall customer satisfaction in four areas: annual statement and billing, customer interaction, policy offerings, and price.

The Better Business Bureau uses 13 factors, such as time in business, open complaints, resolved complaints, and legal action against a company to assign one of thirteen letter ratings, A+ through F.

The National Association of Insurance Commissioners Complaint Index lists the number of complaints registered against an insurer each year and compares it to that of other companies.

All of these resources can help you decide if a company is reputable.

#2 – Compare Policies

Compare the policy offerings of each company to find the one that suits you best. It’s important to make sure you compare policies of the same type.

A level term policy has different benefits and drawbacks than an increasing term policy of the face value. The same is true of an increasing term policy versus a decreasing term, a renewable versus a convertible, etc.

#3 – Get Quotes

Life insurance quotes are the only way to compare prices between various policies and the insurers that write them.

Quotes are available online through convenient quote tools or through local insurance agents.

Try to find the policy with the greatest benefit for the lowest annual cost.

The Bottom Line

Term life insurance is the simplest form of life insurance, and the type recommended for most families. It offers the largest death benefits for the lowest costs.

No matter your financial obligations, there is a term policy that can be tailored to meet them.

Term insurance also the simplest to buy. In the time it takes to read this guide, you can get quotes, compare prices, and apply for a direct policy with dozens of top providers.

If you have a family that would experience financial hardship if you passed away unexpectedly, you owe it to them to explore your term life insurance options.

Start comparing life insurance rates now by using our FREE quote tool below!