What is Term Life Insurance and How Does it Work?

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Ever wonder what is term life insurance and whether this type of life insurance is the right fit for you? Learn more here.

In this article

What is Term Life Insurance and How Does it Work?

It feels just like yesterday since I first met my husband. Quite frankly, I was not expecting to meet my future partner so soon – and then marry him as well! It’s been a whirlwind. 

Before my husband, it was just me and my French Bulldog – no one else to take care of. 

Now that my husband is in the picture, I want to make sure he is taken care of (and that I am taken care of) in the terrible case one of us passes away. 

One of the best ways to ensure that we are both financially secured in the case either of us passes is through life insurance. 

Now, getting my husband on board with considering life insurance – any type of life insurance – was not exactly easy. 

My husband is not a fan of life insurance. He thinks that you’re simply throwing money down a drain and that you’ll never see a return on your investment. He’s right. 

Best case scenario, you’ll never need it and worst-case scenario, your beneficiaries will need the life insurance – but you won’t. In my opinion – it’s a win-win, either way – for the right price.

When my husband and I first started shopping for life insurance premiums (premium is another word for bill) we only considered purchasing permanent life insurance

Our jaws literally dropped seeing the monthly – let alone the annual – cost of the life insurance. 

No way were we going to spend roughly $6,000 per year on permanent life insurance!

When our heart rates calmed down, we decided to check out how much term life insurance premiums would cost us (we were considering buying a $1,000,000 death benefit per person). 

We were delighted to see that the premiums lowered by several thousand dollars – to just north of $400 per year for a million-dollar death benefit at a 30-year term. 

That’s the beauty of term life insurance – it’s cheap and it’s a very effective tool for millennials to protect themselves financially in a worst-case situation. 

Although my husband still grumbles a little about us buying term life insurance, I feel at peace knowing that should something bad happen to him – or me – at least we are secured financially. 

And to be very honest with you, I think that’s the main selling factor with life insurance: peace of mind. 

Purchasing life insurance gives you peace of mind, knowing that your loved ones will be set (or at minimum somewhat set) financially if and when you pass. 

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Why Choose Term Life Insurance?

Keep in mind that term life insurance is not the only life insurance out there. 

There are, in fact, several types of life insurance – but for the sake of this post, we are going to stick with term life insurance.

Types of Life Insurance

Permanent life insurance:

    • Guaranteed death benefit.
    • High premiums.
    • Typically more flexibility.
    • Cash Value build-up (overtime).
    • Can often borrow against cash value.

Term life insurance:

    • Death benefit is guaranteed for a specific term.
    • Low premiums.
    • Less flexibility.
    • No cash value.
    • No borrowing options.

Permanent life insurance is when you pay into a life insurance policy for the rest of your life.

(In other words, your beneficiaries will be guaranteed the death benefit on your life insurance policy – assuming you continue to pay the premiums). 

Because the death benefit is guaranteed (so the life insurance company will have to shake their wallets and pay your beneficiaries at some point when you pass), the premiums will be typically much, much higher. 

Most of the time, permanent life insurance policies build up what is known as “cash value.” 

The cash value builds up over time (so in 20 years from now, you may see a $5,000 cash value within your permanent life insurance policy). 

The cash value is built up from a very small percentage of the monthly (or annual) premiums that you pay to keep your policy “in force.” In force means that your policy is still intact – that it has not yet expired. 

Term life insurance is essentially the opposite of permanent life insurance. 

As the name already suggests, term life insurance guarantees a death benefit for only a certain term (assuming you continue to pay premiums when they come due). 

Typically those terms increase in intervals of 5 years. 

In other words, we could purchase a 5, 10, 15, 20, 25, or 30-year term life insurance policy. 

If we are 30 years old, that means as long as we continue paying premiums to keep the policy “in force” (intact so it does not expire), then our beneficiaries will be guaranteed $1,000,000 if we pass away at any time during that 30-year term. 

Here is the downside: We keep paying the annual premiums to keep the term life insurance policy in force. However, the term life insurance does not build up a cash value. 

That means you do not see any return on your investment aside from a potential death benefit payout (that is, if you pass away within your designated term).

Here is the upside: Because a term life insurance product does not build a cash value, your monthly or annual premiums are actually pretty low. 

Like I mentioned earlier – instead of paying several thousands of dollars per year to maintain a $1,000,000 death benefit on a permanent life insurance policy, our annual premiums decreased to just over $400 per year on a term life policy. 

Talk about getting the biggest bang for your buck.

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Term Life Insurance Pros and Cons


  • Low premiums for a high death benefit.
  • Death benefit covers the financial essentials.
  • In some cases, term life can be converted into whole life insurance (not always recommended).
  • Works great when you are young (low premiums).


  • Covers only your selected term.
  • No forced savings component.
  • No guaranteed death benefit.
  • No cash value build-up.
  • Decreased flexibility in premium payment options.
  • Applying for a new term is typically more difficult (and more expensive due to increased age).
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Why Term Life Insurance is a Great Option for Millennials

, Millennials typically don’t have several extra thousands of dollars lying around to purchase permanent life insurance. 

It’s expensive as it is, and if you are a typical Millennial, you likely have other cost priorities such as paying off student loan debt, credit card debt, or simply making sure you have a roof over your head during a pandemic (and job loss) stricken time. 

As a 20-something year old, how would you be able to afford a $6,000 per year life insurance policy – when you still need to eliminate debt, improve your emergency savings fund and take advantage of investment opportunities while you are young?

You likely won’t be able to – unless you earn $100,000 plus per year. 

Second, while you are a Millennial, you are likely at your healthiest point in life. 

The reason why your health matters is because your health largely will determine the cost of your annual life insurance premiums. 

The healthier you are, the lower your annual premiums. 

Why? If you are healthier, statistically, you have less of a chance of passing away. 

So, that means the life insurance company has a lower chance of paying your death benefit (in other words, more money in the life insurance company’s pockets). 

Third, if you are like any typical Millennial that I’ve met, you likely won’t want to pay more than you absolutely have to. 

I certainly don’t. Why not spend just the bare minimum amount of money on a death benefit that will cover exactly what you need (more on that later) for the amount of time that you only need to be covered for (ie – your working years). 

Typically, you wouldn’t have a dire need – other than providing for your heirs – to stay insured past your working years. 

You no longer earn money, so theoretically you don’t have anyone relying on your earning power anymore).

Why Term Life Insurance is a great option for Millennials:

  • You’re likely at your healthiest point in your life = lower premiums.
  • You likely are just building your wealth, so you don’t have a few extra thousand dollars lying around to spend on permanent life insurance (term life insurance is much cheaper).
  • Not overspending money on term life insurance (you’re only spending for a set period of time).
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How are Term Life Insurance Premiums Determined?

You may be a 29-year-old Millennial in the need for term life insurance and have just run a quote for yourself to see how much you would potentially have to pay for a term life insurance product. 

Let’s say your quote indicates that you have to pay $600 per year. All of a sudden you find out your friend also ran a term life insurance quote and only has to pay $400 per year. 

That’s because term life insurance quotes are based on your personal circumstances – you cannot compare yourself to someone else because there are multiple factors that go into determining how much you pay for life insurance (that goes for term life insurance as well as permanent life insurance).

Below I’ve listed some factors that play a very important role in determining your premium cost.

Factors Determining Term Life Insurance Premiums

  • Health.
  • Smoker vs. Non-Smoker Status.
  • Age.
  • Male vs. Female.
  • State / Location.
  • Annual Salary.
  • Occupation (Blue Collar vs. White Collar).
  • Net Worth.
  • Spouse’s Occupation (if applicable).
  • Hobbies (their risk level – such as sky diving).

For example, the healthier you are, the lower the life insurance premium. 

If you are a non-smoker, you’ll have a lower life insurance premium. 

If you are younger, chances are you will also have a lower life insurance premium, etc.

For these reasons, if you are truly considering obtaining term life insurance at some point down the road, it might make sense to purchase it earlier rather than later – so that you receive a lower premium. 

That’s why my husband and I decided to go with a 30-year term so that we will still have access to the same low-cost annual premium when we are 60 as we did when we were 30.

Below are some more examples that would likely cause your premiums to increase and / or decrease.

Cause for Premium Increase Cause for Premium Decrease
Poor Health
Excellent Health
Non Smoker
Higher Age (typically age 50+)
Younger Age
Highly Industrious Geographic Region
Suburban / Rural Geographic Region
Low or Highly Variable Annual Salary
Consistent, High Annual Salary
Blue Collar Worker
White Collar Worker
Lower Net Worth / High Debt
High Net Worth
High-Risk Hobbies
Low-Risk Hobbies
Large Amount of Traveling
Little to no Traveling
Higher Death Benefit
Lower Death Benefit
Higher Term Period
Lower Term Period

As you can see from the chart – insurance companies like insuring safe people – those who are a very “low risk” profile. 

A low-risk profile for the insurance company means a lower probability for the insurance company to pay the death benefit money, while still collecting the insured’s annual premium payments. 

Overall: a low-risk profile means more money in the insurance company’s pockets.

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What Term Life Insurance is the Best for Millennials?

Without getting into the nitty, gritty details – I want to make sure that you know there are 2 main types of pay structures for term insurance.

And I will warn you now: Make sure you avoid one of those pay structures.

Pay Structure for Term Life Insurance

  • Annual Renewable Term Life Insurance.
  • Level Term Life Insurance.

For Millennials, it is typically recommended to purchase level term life insurance. 

Level term life insurance – as the name already suggests – means your premium will not be increasing over your set term period. 

Let’s say you are 28 years old and just applied for a $500,000 death benefit 30 term life insurance, so you’ll likely have to pay around $250 per year in premiums. 

If you have a level term life insurance – that means regardless if you undergo some serious health condition during the term period or if you turn 55 – your premiums will always be $250 for your set 30-year term.

Level term life insurance is sort of like a safety barrier. You know exactly how much you will have to pay each and every year for your set term. 

There is no risk of having your premiums increase over time, as you age, or if your health deteriorates.

Annual renewable term life insurance on the other hand will see your premiums increase every single year. 

That means with every year, as you grow older, your premiums will increase for 30+ years. 

Sometimes that premium increase can be just $20 or $40 dollars per year. 

Other times, I’ve seen annual renewable term life insurance premiums increase in just 1 year by over $3,000. 

Moral of the Story: If you are a Millennial and want to have some predictability in your life as it relates to your term life insurance costs, consider going with a level term life insurance policy.

What are the Typical Metrics for Term Life Insurance?

The cost of your premium, in addition to your health profile, is also typically determined based on a few additional factors, which I’ve listed below. 

What to Look For Typical Feature

Increases in increments of 5 years.
5 years = typically minimum.
30 years = typically maximum.

$30 - $50 per month ($360 - $600 per year) depending on age, health, death benefit amount, etc.
Guaranteed Death Benefit

As you apply for your term life insurance policy, I want to make sure you know exactly what you need to look for. 

These 3 items are those important points.

How Much Term Life is Enough?

This is a question I receive a lot. And quite frankly – it’s going to be difficult to give you a number because:

  • I don’t know you.
  • I don’t know your personal financial situation.

However, I can give you a few pointers that will hopefully guide you to make better decisions on how to evaluate your financial situation and then decide how much life insurance you will need.

Below is a list I compiled that should hopefully help you better determine how much life insurance you may need. 

Your Situation Your Potential Life Insurance Need
No kids, no spouse
No life insurance
No kids, a spouse with high income
No life insurance
No kids, a spouse depending on your income
Life insurance – typical rules of thumb suggest somewhere around 7x your annual salary – making sure your life insurance death benefit covers any debt obligations you both share (eg. Mortgage, car loans, etc.)
Life insurance – make sure your death benefit would cover future potential expenses such as college, and leaving them a small potential inheritance
Kids & spouse
Life insurance – The No. 1 item I would suggest is making sure your life insurance death benefit covers any debt obligations and future potential costs (college, health care for your spouse, etc.)
Spouse & mortgage and other debt
Life insurance – here I would suggest at minimum make sure your life insurance death benefit covers what you owe on your mortgage and other debt
Spouse, kids, you are the primary income earner
Life insurance – once again, the death benefit should be high enough to cover any debt, any potential future expenses (college, cars, etc.) AND it should also cover your working years. Once you are retired, your spouse and kids won’t be relying on your income anymore – and that’s where I would suggest for the term life insurance period to end. You don’t need to overpay for a term when you no longer are working (in my opinion)
You are a co-signer on a loan
Life insurance – just enough to cover your part of the debt obligation

Keep in mind – if you are planning on having children at some point in your future (which could mean college costs, additional expenses, etc.) I would highly suggest to consider obtaining life insurance now – when you are young and relatively healthy. 

In other words, your premiums would be much lower.

There are 3 situations where I would almost always suggest to purchase life insurance:

1) If you have kids (or are seriously considering having kids). 

You want to make sure you leave your kids at least something behind in the case you pass away during their lifetimes.

2) If you have a significant other depending on your income stream. 

In the case something happens to you – you would likely want your significant other to be insured financially for some time and this is where life insurance would come into play.

3) If you cosigned a loan with your parents / significant other / etc.

Once again, in the case, something happened to you, you would like to make sure your part of the loan obligation would be paid off and the life insurance death benefit would serve that purpose.

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What Happens if I Outlive my Term Life Insurance? 

Unfortunately, (or fortunately), if you outlive your term life insurance period, then your term life insurance will simply vanish as if it had never existed.

Let’s put this in context: Let’s say you purchased a 30-year term life insurance policy at age 30. Now you’re 60 years old. 

You’ve paid into your term life insurance policy every single year and you still seem to be healthy and happy. 

Well, you simply drop your annual term life insurance payments and continue living as you were – now just without life insurance. 

That’s where the term life insurance companies make their money: They bet that you (the insured) will outlive your term (so in this case, the term was 30 years). 

If you do outlive your specified term, you paid the life insurance company $12,000 over 30 years (assuming the cost of your life insurance was $400 per year) and you don’t get anything in return. 

The life insurance company wins. 

Most of the time, that bet goes in the favor of the term life insurance company (they make money, you lose money – however, you’re still alive!). 

However, there are those times when something terrible happens, and the term life insurance company will need to pay the death benefit to your beneficiaries. 

That’s when you (and your beneficiaries) will be happy you had that policy in force. 

Closing Thoughts

In the end, you have to determine whether term life insurance is the right move for your personal financial situation. 

As I mentioned previously, typically term life insurance is a great way to insure debts, working years, and other potential gaps during your lifetime for a cheap cost – assuming that you are healthy.

Most young professionals that I have coached tend to lean toward buying term life insurance because it’s cheap and they don’t need permanent insurance (such as Whole Life insurance or Universal Life insurance). 

However, keep in mind that if you are single and have no dependents – you may not even need to purchase life insurance because there is no need to designate a beneficiary. 

The downside to buying term life insurance is that you won’t see your money back. 

Moreover, you likely won’t need your term life insurance (which is a good thing). 

That’s exactly where the insurance companies make their money: The life insurance companies bet that over the term of your term life insurance period, you will not pass away – and the life insurance companies will not have to make a death benefit payment toward your beneficiaries. 

The life insurance game is essentially a gamble. 

It has to do with your peace of mind – and whether you are comfortable paying X amount of dollars per month for a benefit that you (or your beneficiaries) may never see. 

Before you go ahead and commit to a term life insurance product, make sure you do your research. 

Talk to your significant other if they feel comfortable about this potential new purchase. 

And of course, make sure you obtain several quotes before you go ahead with one product. 

Quotes typically should always be free so you have a better idea of how much you can expect to pay per month (or per year) for your life insurance product. 

Do your research now and your bank accounts will thank me later!

What has your experience with term life insurance been so far?

Fiona Smith
Fiona Smith
Fiona Smith is the founder of The Millennial Money Woman. She holds her Master of Science Degree in Personal Financial Planning, has advised decamillionaires for 6 years in the corporate wealth management sector and has co-founded a local non-profit community teaching financial literacy. She is the author of the personal finance book How to Get Rich from Nothing and her work is featured on Forbes and FinCon.

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