Term life insurance

What term life insurance is

Term life insurance covers you for a fixed period. You choose the length, commonly 10, 15, 20 or 30 years, and the face amount. If you die during that period the insurer pays the death benefit. If you are still alive when the term ends, the coverage stops and nothing is returned. There is no cash value, no savings component and nothing to surrender.

That simplicity is exactly why term is cheap. The insurer is only pricing the chance that you die within a defined window, and for most healthy buyers that chance is small. A person in their thirties can buy several hundred thousand dollars of term coverage for the price of a modest final expense policy, which is the correct trade when the need is large and temporary.

Most term sold today is level term, meaning the premium and the death benefit stay the same through the whole period. Annual renewable term, where the premium rises every year, still exists and is usually a poor deal for anyone holding it for long. Group term through an employer is a third variety, and its defining feature is that it belongs to the job rather than to you.

Why it usually fails as funeral cover

A funeral is not a temporary need. It is a certainty with an unknown date, and the most likely date is in old age. Term insurance is a promise with a deadline. Matching those two produces a predictable failure.

Consider a 45 year old who buys a 20 year term policy intending it to cover a funeral. The coverage ends at 65, at which point life expectancy for a person that age in the United States is well over another fifteen years. The policy has almost certainly expired before it is ever needed. Every premium paid bought protection during the years the person was least likely to die, and the years that actually matter are uncovered.

The second problem is that health arrives on its own schedule. Buying a replacement policy at 65 or 70 means being underwritten again with whatever medical history has accumulated by then, at whatever rates apply at that age. Some people are fine. Others find the door has closed, which is the single worst outcome in this market and the reason permanent coverage exists.

What happens when the term ends

Most level term policies do not simply switch off. They enter an annually renewable phase where you can keep the coverage without new underwriting, and the premium is recalculated at your attained age every year from that point. The increase is not gradual. It is typically a multiple of what you were paying, and it goes up again every year afterwards.

In practice almost nobody keeps it. The premium becomes unaffordable within a year or two, the policy lapses, and the coverage that was in place for twenty years disappears at the age when it was starting to be relevant. Insurers price this behaviour into the product. The overwhelming majority of term policies never pay a claim, which is why term is affordable in the first place.

The important dates are on your policy schedule. Find the end of the level premium period, the final expiry age, and the conversion deadline, which is the one people miss.

Where term is genuinely the right answer

Term insurance is an excellent product for the job it was built for, and this site is not going to pretend otherwise. It is the right choice whenever the need is large, temporary and has a date attached.

• Replacing an income while people depend on it. If your household would struggle without your earnings, term buys the largest death benefit per dollar until the youngest child is independent.
• A mortgage. A term matched to the remaining years on the loan keeps the family in the house, and the need genuinely ends when the loan does.
• Years with dependent children. Cover to the point where the youngest finishes education, which is a real end date.
• Business obligations. A loan guarantee, a buy sell agreement or a key person need that runs for a defined period.
• A stay at home parent. The cost of replacing childcare and household work is real, temporary and easy to price.
• Bridging to retirement. Coverage until a pension, a paid off house or a retirement account can carry the survivor instead.

In every one of those cases the amount needed is far larger than a funeral, and buying it as permanent insurance would be unaffordable for most families. Term is what makes the coverage possible at all.

Term compared with whole life and burial insurance

Read how whole life works for the mechanics of the middle column, and final expense insurance for the right hand one. Both are permanent, which is the difference that decides this comparison.

Conversion, the feature nobody uses

Most term policies include a conversion privilege. It lets you exchange some or all of the term coverage for a permanent policy from the same insurer without answering a single health question. Your permanent premium is based on your age at conversion, but your health is treated as it was when the term policy was originally underwritten.

For anyone whose health has deteriorated, this is the most valuable clause in the contract, and it is routinely wasted because nobody reads it. Conversion has a deadline, commonly the end of a set number of policy years or a specific attained age such as 65 or 70, whichever comes first. Once it passes it cannot be recovered.

• Find the conversion provision in your policy and write down the deadline.
• Check which permanent products the insurer allows you to convert into, since the list is set by the company.
• You can usually convert part of the face amount rather than all of it, which keeps the permanent premium manageable.
• Converting requires no new medical underwriting, which is precisely why it matters if your health has changed.

What to do if your term policy is running out

This is the situation that brings most people to a page like this one. The order of operations matters, because one common mistake causes real harm.

• Read the schedule and find the end of the level period, the expiry age and the conversion deadline.
• Decide what the coverage is still for. If the mortgage is paid and the children are grown, the remaining need is often the funeral and final bills rather than income replacement.
• Price the options side by side, which usually means a conversion, a new small permanent policy, or letting the term go if a permanent policy is already in place.
• Apply for the replacement first. Never cancel or stop paying an existing policy until the new one has been approved, issued and delivered, since a gap in coverage cannot be undone if your health changes in between.
• Remember that a new policy starts a fresh two year contestability period, which is a normal part of any new contract.

If the remaining need is the funeral, size the replacement to the actual bill rather than to the old face amount. The funeral cost breakdown gives you a real figure to work from, and whether existing life insurance covers a funeral covers the timing problem that surprises most families.

Owning both, which is often the honest answer

The two products are not rivals. A great many households are best served by a large term policy covering the working years and a small permanent policy covering the funeral, bought at the same time. The term expires when the temporary need does, and the permanent policy is still standing at 90 when it is finally needed.

The mistake to avoid is doing this in the wrong order. Buying a $25,000 permanent policy while a young family needs several hundred thousand dollars of protection solves the smaller problem and leaves the larger one open. Cover the catastrophic need first with term, then add the permanent policy sized to the funeral you actually want. How burial insurance works covers the second half.