What is Term life Insurance?

If you pass away while your term life insurance policy is in force, your beneficiary will receive the death benefit. If you do not pass away during the term, no one will receive the death benefit. And premiums you pay are typically nonrefundable.

The cost of a term life insurance policy is based largely on the insured person's health and age at the beginning of the term, says the Insurance Information Institute (III). Declining health or increasing age can make it difficult or more expensive to acquire a new term policy as you get older.

It also depends on the policy itself. The “term” of a policy refers to the period during which the policy is active. A longer term is typically more expensive per month than a shorter term, given the insurer is taking on more risk.

For example, a 40-year-old woman might pay under $350 a year for a policy with a 20-year term and a death benefit of $500,000, according to Forbes. But for a 10-year term, she may pay roughly $275 a year.

Term life insurance is typically much more affordable compared to permanent life insurance, according to U.S. News. Depending on the specific term life policy, you may even be able to convert it to a permanent policy.

Additionally, term life policies give you the flexibility to arrange coverage and a term that are fit for you and your budget. Term lengths run the gamut of 10 to 30 years, says MarketWatch.

The characteristic that binds all types of term life policies is that coverage is active for an agreed-upon period. Here are the different types of term life policies and the characteristics that distinguish each.

Fixed term

This type of policy lasts for a set period of time, like 10, 20 or 30 years. The premium you pay stays the same – or “fixed” – throughout the term.

Increasing term

As the name may suggest, the coverage amount on this type of policy increases over time. This could be helpful if you expect your financial needs to grow, such as when you have more children or take on a bigger mortgage.

Decreasing term

Conversely, decreasing term policies describe those whose coverage amount decreases over time. It is often used for covering debts that decrease as you pay them off, like a mortgage.

Annual renewal

This policy is renewed every year, and the premium may increase as you get older. It’s flexible because you can renew it each year, but it might become more expensive over time.

These types of term life insurance offer different benefits depending on your needs.

Term life insurance isn’t the only option, of course. There are also different types of permanent life insurance policies, each with their own features. Here’s how term life insurance compares to other types:

Whole life insurance: A whole life policy builds cash value over time, which you can borrow against or withdraw like a savings account.

Universal life insurance: A universal life policy is similar to whole life insurance but offers more flexibility. You can adjust your premium payments and the death benefit over time. Like whole life, it builds cash value, but the cost can vary.

Variable life insurance: A variable life policy allows you to invest your premiums in different accounts like stocks and bonds. The cash value and death benefit can grow based on how well your investments do.

If your term policy is renewable, you may be able to extend your coverage for another term, up to a specified age. If your term policy is convertible, you may be able to convert it to a permanent life policy. Check with your insurance provider for details on convertible policies, as the conversion typically has to happen within a specified time period.

When your term ends, you'll likely pay higher premiums (or regular payments) if you renew or purchase a new policy, says the III.

Term life insurance policies may be classified as either level or decreasing term, according to the III. Level term policies, in which the death benefit does not decrease, are the more common form of term life insurance, the III says. Decreasing term life insurance policies typically see the death benefit decrease at specific intervals during the course of the term.

Some term policies allow for an increase in your premiums during your existing term. To avoid any surprises down the road, read your policy carefully and ask your insurance provider questions up front.

Finally, some term policies offer a return of premium option that entitles you to have some or all of your premiums refunded at the end of the term, assuming you have made no claims on the policy, says the III. It's worth noting, however, that such policy premiums tend to be significantly more expensive than non-refundable premium options.

Buying life insurance is a step toward helping to ensure your family's financial future. Consult with your insurance provider to determine whether term life insurance meets your needs.