There are many different types of life insurance available to today’s consumers: whole life insurance, universal life insurance, variable life insurance, variable universal life insurance...the list goes on.
Jump ahead to these sections:
- What is Term Life Insurance, and How Does it Compare to Permanent Life Insurance?
- What’s the Average Cost of a Term Life Insurance Policy?
- How Does the Cost of a Term Life Insurance Policy Compare to Other Life Insurance Types?
- What Factors Affect the Cost of Term Life insurance?
- How Do You Know if Term Life Insurance is Worth Purchasing?
- Quick Tips for Getting a Better Price on a Term Life Insurance Policy
Perhaps the most popular type of life insurance is term life insurance. “Buy term and invest the difference” became the mantra of a legion of salespeople back in the 1980s. They told people buying whole life insurance that they were making a mistake and should only buy term insurance. Some financial advisors and insurance experts still only recommend term life to their clients.
But what is term life insurance? How does it differ from other types? In this article, we define what term life insurance is, and compare and contrast to whole life insurance. Additionally, we examine how much it costs, what influences term life insurance policies pricing, if buying term life is even worth it, and tips for getting a better price on term life insurance.
What is Term Life Insurance, and How Does it Compare to Permanent Life Insurance?
If you want to remember the main difference between these two types of policies, just remember to take the names literally.
Term life insurance is for a set term of time—think 1, 5, 10, 20, or 30 years—and then expires. Permanent life insurance is life insurance you keep permanently. It never expires, but it will lapse if you don’t pay your premiums.
Another differentiator between term life and permanent life policies such as whole life, universal life, and variable life is that permanent policies have a cash value (or savings) component that builds over the years. A portion of each premium payment you make is deposited into the policy’s cash value. As a policy owner, you can make withdrawals or borrow against this cash value.
The opposite is that term life insurance has no cash value component. It is strictly life insurance with a death benefit that pays a lump sum to your beneficiary when you die. People buy term life for temporary needs, like protecting a mortgage if they die so their family can stay in their home, funding their children’s college education in the event of their death before the kids go to college, and making sure an installment loan can be paid off if they were to die.
Permanent life insurance is designed to meet an entirely different set of needs because not only does it have a life insurance component, but it has the savings element, as well. People buy permanent life insurance for permanent or long-term needs, like providing an additional source of money when you retire or paying your family money to bury you and pay final expenses when you die.
What’s the Average Cost of a Term Life Insurance Policy?
Like all types of life insurance, the age and gender of the insured and the face amount of the policy will determine the rates. Here is a breakdown of monthly term insurance rates for males and females between the ages of 25 and 60.
|
AGE |
SEX |
$500,000 |
$750,000 |
$1,000,000 |
$2,000,000 |
|
25 |
Male |
$26.67 |
$37.09 |
$44.82 |
$83.41 |
|
Female |
$20.81 |
$28.31 |
$34.18 |
$62.16 |
|
|
30 |
Male |
$27.46 |
$38.28 |
$46.81 |
$87.28 |
|
Female |
$21.88 |
$29.91 |
$36.21 |
$66.13 |
|
|
35 |
Male |
$28.97 |
$40.55 |
$50.44 |
$94.35 |
|
Female |
$24.39 |
$33.67 |
$41.56 |
$76.80 |
|
|
40 |
Male |
$39.02 |
$55.62 |
$69.75 |
$132.90 |
|
Female |
$32.42 |
$45.71 |
$56.80 |
$107.19 |
|
|
45 |
Male |
$59.10 |
$85.75 |
$110.40 |
$214.33 |
|
Female |
$46.36 |
$66.44 |
$83.51 |
$160.73 |
|
|
50 |
Male |
$93.23 |
$136.94 |
$174.13 |
$340.64 |
|
Female |
$71.03 |
$103.64 |
$128.87 |
$250.87 |
|
|
55 |
Male |
$150.72 |
$223.28 |
$282.34 |
$556.00 |
|
Female |
$105.66 |
$155.68 |
$200.45 |
$393.04 |
|
|
60 |
Male |
$262.16 |
$390.43 |
$493.42 |
$973.60 |
|
Female |
$189.08 |
$280.82 |
$351.76 |
$692.16 |
Methodology: Rate increases by age are based on a 20-year term life insurance policy for non-smoker males and females in Preferred health rating as of February 11, 2021. This calculation is a composite of 11 carriers that offer term life insurance policies, including AIG, Banner, Brighthouse, Lincoln, Mutual of Omaha, Pacific Life, Principal, Protective, Prudential, SBLI, and Transamerica.
As you can see, the monthly rates increase as you get older, making it beneficial to take out a term life insurance policy when you’re young and in good health.
However, even though the rates are much higher for someone in their 60s, it can still make sense sometimes to buy a term life policy at an older age. For example, someone may have a life-long dependent or start a family later in life, which is common among many millennials.
How Does the Cost of a Term Life Insurance Policy Compare to Other Life Insurance Types?
Compared to other types of permanent life insurance policies, like whole life insurance, term life is consistently the most affordable type of life insurance available.
Whole life insurance policies can be as much as 5 to 15 times more expensive than a comparable term policy. There are three main reasons for this:
1. They are in force longer
Unlike a term policy that has an expiration date, whole life insurance lasts your whole life as long as you pay the premium. Whole life policies pay death benefits much more often than term policies because it’s more likely you’ll die while the whole life policy is active.
2. They build cash value
Whole life insurance is a type of permanent life insurance, so it has a cash value component to accumulate money, as well as a life insurance component. A portion of each premium payment you make goes into the cash value of a whole life policy and grows at a predetermined rate of interest.
3. They have more fees
With whole life insurance policies, you have management fees that term life insurance doesn’t have, adding to the cost of the policy.
There are many other types of permanent life insurance, besides whole life, that are more expensive than term life insurance, including
- Universal life insurance
- Variable life insurance
- Variable universal life insurance
- Survivorship life insurance
- First-to-die life insurance
A professional life insurance agent can help you with finding the best life insurance policy and determining how much life insurance you may need.
What Factors Affect the Cost of Term Life insurance?
The pricing of a life insurance policy is very complex. Life insurance companies employ many actuaries that determine who constitutes an acceptable risk as an applicant for coverage, who doesn’t, what conditions make someone uninsurable, and many other factors.
Let’s look at what makes term life less expensive than other types of life insurance policies and what can drive up the price of term life policies.
Four major factors determine whether you will think the quote your receive for term life is expensive or inexpensive:
- Your health. Insurers will make you pay more if you’re a smoker or if you have had any of these types of illnesses:
- High blood pressure
- High cholesterol
- Diabetes
- HIV/AIDS
- Hepatitis
- Recreational drug use
- Chronic illness
- And more
These conditions can cause your policy to be “rated,” meaning your rates for your policy will be increased by a certain percentage, anywhere from 25% to 100% more than the premium for the same face amount of someone in good health.
- Your age. Life insurance prices rise as you get older because your remaining life expectancy is shorter, meaning the life insurer is more likely to pay out a death benefit for you than someone younger.
- Your hobbies. Your rates are likely to rise if you engage in dangerous hobbies, such as skydiving, hang-gliding, or parasailing.
- Your gender. Men pay higher premiums than women, on average, because of the shorter life expectancy for men.
How Do You Know if Term Life Insurance is Worth Purchasing?
You’ll know term life insurance is worth purchasing by asking yourself this question: “Is there anyone that depends on me financially and who would suffer financially if I were to die?” If you answered “yes” to that question, term life insurance is worth purchasing.
Term life insurance is a practical and affordable way to help protect your loved ones from financial hardship. The death benefit of a term policy can help:
- Replace lost income and pay for living expenses, like a mortgage or rent
- Pay debts you leave behind
- Provide for kids care if you or your spouse are stay at home parents
- Pay for funeral, burial, and other final expenses
- Fund your children’s college education
- Pay unpaid medical bills or taxes
- Leave an inheritance for loved ones
Quick Tips for Getting a Better Price on a Term Life Insurance Policy
Here are four quick tips to make sure you’re getting the best price when you buy a term life policy:
- Get it when you’re young. You’ll save thousands of dollars over the life of your policy if you buy your term life policy when you’re younger. There’s a big difference in the rates, even if you’re only ten years older.
- Get it while you’re healthy. Your health can change unexpectedly. It doesn’t take long to be diagnosed with diabetes or hypertension, which can bump your rates up considerably.
- Buy a longer-term policy. 20-year level term insurance will cost you less each month than a 5-year term policy for the same face amount. Annual renewable term (ART) can get very expensive, very quickly. Lock your lower rate in with a long-term level death benefit/ level premium term life policy.
- Shop with an independent life insurance agent. An independent life agent can get quotes on term life insurance coverage from dozens of insurance companies. Captive agents who represent only one company are usually limited to selling only one company's policies, so they can’t shop around for you and find you the lowest rate.
The Cost of Term Life Insurance
There is little doubt that term life insurance is the most economical type of life insurance available, and it will serve you well by protecting your family when they need it most. If you have a pre-existing medical condition, discuss it with your agent and consider applying with several companies to see which one offers you the lowest rate. Take the time to comparison shop – it’s usually well worth it.