What is term life insurance, and how does it work? 

If you're interested in buying term life insurance, but not sure what it is or how it works, read more to learn about the benefits and coverage of a term life policy.

A young family playing together at home on the couch.

What is term life insurance?

Term life insurance or short-term life insurance provides affordable protection, often with a guaranteed premium, for a set period.1 The premium for term insurance is initially lower than the premium for a comparable whole life insurance policy; however, the premiums can increase at each renewal. This initial lower premium usually makes term insurance an ideal choice for individuals with a temporary need for life insurance protection.

How does term life insurance work?

  • If the insured should die while the policy is in force, the face amount is paid to the named beneficiary. At the end of the premium guarantee period, the insured can renew the coverage at a higher premium. Unlike whole life insurance, term does not accumulate cash value, and in most instances, it does not earn dividends.
  • There are two basic types of term policies: increasing premium term, which renews annually at a higher premium, and level premium term, which features a fixed premium for a specific number of years and then increases in subsequent years.

Term life insurance is relatively more budget friendly compared with a permanent insurance at the same coverage amount.

The advantages of term life insurance? 

  • Budget friendly2
    Term life insurance is for a set period, often 10 or 20 years, and is relatively affordable compared with a whole life insurance policy for the same amount of coverage. It’s common for younger, first-time policy owners to purchase term. Many term policy owners match the length of their term coverage with a key life milestone, like paying off a mortgage or seeing their children through college.
  • Conversion privilege
    Many term policies offer the ability to convert term coverage into whole insurance without submitting proof of good health.3 This privilege is usually available during the first several years of the policy. If permanent insurance is not within your budget at the present time, the conversion privilege guarantees your insurability later, even if you otherwise become uninsurable.
  • Customizable options
    A term life policy provides you with protection now and gives you options for changing your coverage as your life changes. An excellent use of term insurance is as an added "rider" to a whole life plan. Let's say an individual requires $200,000 in life insurance coverage but can't afford the premium for a 100% permanent plan. An affordable option may be to purchase a $50,000 permanent policy with a $150,000 term rider.

    The mix of term and whole life insurance can provide the desired amount of coverage with more limited cash value accumulation, at a premium that fits within a given budget. In the future, when income increases, the term portion can be converted into permanent insurance.
A mother sitting a table lovingly embracing her young son.

What to look for when buying term life insurance. 

When choosing a term policy that's right for you, you'll want to be sure to work closely with an agent to understand all the features it offers. Consider the following:

  • Be sure that the policy is guaranteed to be renewable. That means you can renew your policy without a physical exam. Also, be sure that it contains a conversion privilege. Together, these two features protect your future insurability.
  • Most companies offer different possibilities for conversions, so be sure to discuss these options with your agent when you're ready to convert. Your agent can supply a computer-generated illustration to help you make your decision.
  • Some companies offer a rider to extend the premium guarantee (sometimes called a modification of premium guarantee rider), which, for an additional cost, guarantees that for a limited time, the premium will not be greater than the scheduled premium stated in the policy contract.
  • It’s not advisable to simply shop for the policy with the lowest premium. Before worrying about saving a few bucks, you'll want to be sure that the insurance company is financially sound. Longevity, size, and financial ratings are key considerations when choosing an insurance company.

You can check the financial health of insurers by reading what the independent ratings agencies say about them. A.M. Best, Fitch, Moody’s, and Standard & Poor's are companies that annually publish ratings of insurance companies.

Related Articles 

Want to learn more term life insurance?

A New York Life financial professional can help determine what’s right for you.


1The guarantees of a Term policy are based on the claims-paying ability of the issuer.
2 Premiums are usually lower for term life insurance than they are for permanent life insurance for the same amount of coverage in the early years.
3 Subject to certain conditions and limitations.

New York Life policy form numbers: Yearly Convertible Term (ICC18218-135P); Level Premium Convertible Term (ICC18218-60P) SMRU: 1700121