When is Term Life Insurance Worth it?

Term life insurance is one of the more affordable financial protections you can buy for your loved ones. But is it right for you? 

Let's answer that question now. Read on to learn the differences between term life and permanent life, how to know if you need term life and how much coverage to get, the key questions to ask when buying term life, and where you can find more information about specific term life providers.

Whole vs term life insurance

Term life has an expiration date, which is usually 10 to 30 years after coverage begins. Permanent life insurance, as the name implies, does not expire. Your permanent policy stays in force as long as you keep paying the premiums. 

Beyond the coverage period, there's another key difference between term life and permanent life. Permanent life insurance has a savings component called cash value. Your provider funnels a portion of your premiums into a cash account, where it generates investment gains or earns interest. Over time, this cash-value balance increases and eventually funds your death benefit. 

Depending on your policy, you may have the option to withdraw or borrow against your cash value. And if you cancel your permanent life insurance, the provider must return the cash balance to you, less any fees. 

Term life doesn't have that savings feature. It doesn't accumulate value or produce income. After paying the premiums for decades, you can outlive the policy term and have no asset value at the end. 

That's not necessarily a bad thing, however. Because term life is temporary, it's much cheaper than permanent life. And those lower premiums allow you to protect your family when they need it most. 

When you need term life insurance 

How would your family fare financially if you were to pass away tomorrow? If they'd struggle to pay the rent or mortgage, that's a sign you need term life coverage. 

Term life functions primarily as household income protection. It's smart to have when you're the breadwinner -- the death benefit helps your surviving family members establish themselves financially without your paycheck. They could use the money to pay off the mortgage, fund the kids' college tuition, and pay the bills until they're on their feet. 

Your need for term life insurance lessens when your income isn't critical to the household. Perhaps your kids are grown and the family home is paid off. In that scenario, your surviving loved ones could probably manage financially without you. 

Many people reach that level of financial security in their senior years. This is why insureds accept the eventual expiration of term life insurance. By the time that expiration date arrives, the need for the death benefit has waned. 

Choosing your coverage amount 

You can decide on a term life coverage amount with a quick estimate or a more detailed analysis. 

The quick way is to multiply your annual income by 10. So, if you make $60,000 annually, you'd want $600,000 in coverage. 

Alternatively, you could estimate your family's specific needs. You might add up things like: 

• The cost of repaying student debt, mortgage debt, and credit card debt

• Future college tuition expenses

• Replacement of your income for five years or more

• Estimated funeral expenses

If this estimate is higher than the coverage you can afford, consider subtracting any savings or assets that would transfer to your family members at your passing. 

Questions to ask when buying term life insurance 

Fortunately, term life insurance is not terribly complicated. There are a few specifics you'll want to clarify though, as you'll see in the questions below. 

Is renewal guaranteed? 

You hope to be financially established by the time your term life insurance expires. But it's nice to have the option to extend your coverage if things don't go as planned. 

Ask prospective insurers if renewal is guaranteed at the end of the term. Often, it is, but with higher premiums.

Can I convert this to a permanent life policy? If so, when? 

Many term life policies offer convertible term life insurance. You'll pay for the conversion -- but it might be worth it if your financial situation has changed. Permanent life insurance becomes more attractive once you are financially secure. At that point, you might appreciate the tax-deferred investment growth available with permanent life, or the ability to fund an inheritance for your loved ones. 

The thing is, some term life policies are convertible only in the earlier years of coverage. You'll want to know if your term life has a conversion feature and when you can exercise it.  

Can I access my term life benefit while I'm living? 

Many term life policies include the option to access your death benefit if you are terminally ill. Generally, you can advance yourself a portion of the payout with a physician's certification of your condition. This feature provides you with funding for end-of-life care or medical expenses. 

You should expect to receive this "accelerated death benefit" feature free of charge. Also ask about the terms of the accelerated death benefit: How much of your coverage can you use and under what circumstances?

Term life providers, head-to-head 

If the concept of term life insurance still feels fuzzy, see our best term life company comparison for more concrete details. We dive into coverage options and premiums for nine popular term life providers, including Bestow, Haven Life, Pacific Life, and Protective. You'll learn how much term life insurance costs, what it takes to apply for coverage, and different ways you can customize your coverage.  

A closer look at Haven Life  

You can also reference our Haven Life review. Haven Life is one of the younger providers on the term life scene. The company launched in 2014 to provide affordable and customer-centric life insurance to the masses. Although Haven Life is a startup, there is financial security backing the coverage: MassMutual and its subsidiary C.M. Life issue all Haven Life policies. 

Read our Haven Life review to find out who's eligible for Haven Life coverage, the types of term policies available, how the claims process works, and what existing customers have to say about this provider.