Is Term Life Insurance Worth It?

Some readers might wonder: is term life insurance worth it? Here’s how to decide if it’s the right fit for you.

Updated: February 16, 2023

Life is unpredictable. While no one likes to dwell on death, it’s important to have the right life insurance policy to protect your loved ones should the unthinkable occur.

The good news is that you can give yourself and your beneficiaries peace of mind at a relatively low cost. While standard whole life insurance often comes with high premiums, term life insurance can present an affordable alternative. Since this kind of insurance only covers you for a certain number of years before you have to renew, some readers might wonder: is term life insurance worth it? Here’s how to decide if it’s the right fit for you.

What is term life insurance?

Term life insurance is a type of life insurance that provides coverage for a fixed period of time. The policyholder pays premiums to the insurance company during this period, and if the insured dies within that time frame, their beneficiaries receive a lump sum payment. Term life insurance policies are usually available for 5- to 30-year terms. While the cost of the premiums will depend on the amount of coverage, term life insurance is generally less expensive than whole life insurance.

There are three main term life insurance options to choose from.

Decreasing Term Plan: Under this plan, your “death benefit” — or the disbursement your loved ones will receive when you pass away — decreases monthly or annually at a predetermined rate throughout the policy term. While the death benefit will diminish over time, your premium won’t change. For that reason, decreasing term plans are potentially less affordable than other options. However, they can make sense if your beneficiaries are currently making loan or mortgage payments that you know will decrease over the course of the policy term.
Annual Renewable Plan: This option allows you to renew your policy on a year-to-year basis without having to reapply or take a medical exam. However, your premium will increase each year while the amount of coverage remains the same. These plans can only be renewed up to a certain age, which varies by carrier. (Most insurance companies provide coverage for 18- to 65-year-olds. However, many will cover individuals up to age 85.) An annual renewable plan may be best if you have beneficiaries with short-term debts that you know will be paid off within a few years.
Level Term Plan: With a level term plan, both your premium and death benefit stay the same for the duration of your policy. Though this option may start out with higher premiums than you’d see on an annual renewable or decreasing term plan, it provides more consistent financial protection. Level term insurance is a good option for someone looking to cover their family's immediate expenses as well as any future expenses.

Term life insurance vs. whole life insurance

Not all life insurance policies are created equal. Whole life insurance covers your family for your entire life. Term life insurance, on the other hand, offers more limited coverage, and you have to decide how long you anticipate needing the coverage for. The death benefit will be paid to your beneficiaries only if you die before the term is up.

The other key difference between term and whole life insurance is the price. Whole life insurance is substantially more expensive than term insurance. In some cases, the annual premiums can be five to ten times more expensive. This makes whole life insurance cost-prohibitive for many Americans.

Term life insurance might be a good option if you:

Are looking for an affordable way to protect your family financially
Need coverage for your dependents for a finite period of time
Are seeking coverage to help your partner pay a mortgage and other monthly bills that have an expiration date
Think you might want permanent life insurance in the future but can’t afford it right now. (Many term life policies can be converted to whole life coverage, though the deadline for conversion varies by policy.)

Whole life insurance might be a good option if you:

Want lifetime coverage starting now
Can afford a higher premium
Have a lifelong dependent, like a child with disabilities
Want a life insurance with a cash value component (a savings account that you can withdraw from or borrow against while you are still alive)

The benefits of term life insurance

Term life insurance is an excellent option for many families and individuals. Here are some of the benefits.

Term life insurance is more affordable than other types of life insurance plans — often one-fifth the cost of whole life insurance.
Term life insurance is straightforward and easy to understand: it simply provides a death benefit if you die within the paid policy term.
It’s easy to add more coverage. Most carriers let you easily up the coverage for your term by up to 10 times without incurring a huge premium increase.
If you die during your policy term, your beneficiary or beneficiaries will receive a lump sum from the life insurance company. Just like with whole life insurance, the death benefit disbursement will be tax-free. That means the recipient(s) can keep the full amount to use as needed.
If you decide to cancel your term policy while it’s active, you can do so without incurring fees or penalties. That can make it feel like less of a financial commitment than whole life insurance.
Term life insurance policies are flexible, offering many policy and payment options. You can choose to pay your premiums monthly, quarterly, biannually, or annually. You can also choose how long you need coverage; most life insurance companies offer terms anywhere from five to 30 years in length.

The disadvantages of term life insurance

Though term life insurance is more affordable than whole life insurance — and offers more flexible coverage — it does come with some downsides.

Term life insurance has no cash value component. Unlike whole life policies (which come with a tax-deferred savings account), there is no way to invest any part of your term insurance premiums. All funds are put toward your death benefit; you can’t manage or grow them over time. This means that if you don't end up using your term insurance’s death benefit, then all those funds go straight down the drain.
Term life insurance does not cover pre-existing conditions or long-term care costs. That includes conditions like diabetes or cancer. So, if these were already present before you purchased coverage, then they'll never be covered by that plan — and neither will any future occurrences thereof. The same is true of long-term care coverage: if a beneficiary needs help taking care of themselves due to old age but hasn't purchased supplemental long-term care insurance before the need arises, then they're out of luck.

Who should consider term life insurance?

Anyone looking to support their family's financial wellbeing should consider term life insurance. It is an affordable way to protect your loved ones in the event of a tragedy.

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Customer Type	Benefits
Young Couples	Insurance may be the last thing on newlyweds’ minds, but this is actually the ideal time to buy term life coverage. The younger and healthier you are, the better your rates will be. A term life insurance payout can be used to replace lost income, pay down debts (including mortgage, car, and student loans), and cover future financial needs like childcare and education costs.
Sole Financial Providers	The loss of a single-income provider can be devastating to a family. Term life coverage can help the surviving family members replace the lost income, giving them time to stay home with children rather than going back to the workforce. Proceeds can also be used for everyday expenses, current and future childcare, and education costs.
Individuals with Sizable Debt	If you have significant debt, your designated beneficiary can use your death benefit proceeds to pay major expenses like a mortgage or student loan. This can save them from having to take on that debt themselves. The death benefit can also be used to replace income or provide financial support to surviving family members.
Stay-at-Home Parents	Term life insurance can provide stay-at-home parents with added peace of mind. The benefit can be used as an income supplement or to pay for childcare or other expenses, like housing, healthcare, or property taxes.
Business Owners	Term life coverage can also provide financial security for your business interests. Your death benefit can be used to pay off debts, expenses, and outstanding taxes in case you pass away. (The exact details are usually spelled out in a buy-sell agreement contract, which is especially important if ownership or shares in the company are to be transferred to another person in the event of the policyholder’s death.) Business owners with valuable employees can also take out term life insurance on those employees. This is often called “key man insurance.” In this scenario, the business owner pays for the policy, and the company is the beneficiary, receiving the death benefit if the key employee dies.

Who probably doesn't need term life insurance?

If you don't have dependents, then the rate of return on your premiums may not be worth it. Consider the cost of paying the premium versus the benefits your beneficiary will receive if something happens to you. For example, if your family doesn't need your life insurance payout because they're financially secure, and your term life insurance premiums may cause you a significant burden, it may not be worth taking out an individual policy.

Another group who may not want a term policy is young people without dependents who are at peak health. If this describes your situation, then there's probably no need for life insurance coverage at this time. Instead of paying premiums, it may be better to save your money and allocate it to a different investment vehicle for the time being.

How long will I need term life insurance for?

The length of time you’ll need life insurance depends on your age, health, and family situation. If you're young and healthy, a 15- or 20-year term might be sufficient to cover a mortgage and other debts for your family members if something happened to you. If your savings are tied up in other assets — including individual retirement accounts (IRAs), 401(k)s, or stock investments that may continue to grow over time — you may want to consider a longer-term policy. This may be necessary to meet all of your dependents’ future financial needs while they have no income. The term length will also depend on how much income is needed each year, as well as what kind of lifestyle your dependents want to maintain without having to work more than is necessary.

How much does term life insurance cost?

Life insurance premiums vary widely depending on a number of factors. These include your age, medical history, term length, and the total amount of coverage. Usually, the bigger your benefit, the higher the premium will be. Premiums can be paid monthly, quarterly, or annually depending on what type of policy you choose. Premiums may also vary according to your state’s particular regulations. The best way to get an idea of what term life insurance would cost for you is to request a free estimate online.

How are claims paid out?

In the event of a policyholder’s death, claims are paid out by the life insurance company. The company is regulated by state law, as well as by federal law and organizations such as the NAIC (National Association of Insurance Commissioners). In most cases, if you die before your policy expires, your beneficiaries receive a death benefit. This can be paid directly to them or used to cover your outstanding debts so that they don’t have to worry about them after your passing.

Alternatives to term life insurance

Aside from term life insurance and whole life insurance, there are several other life insurance alternatives to choose from. (As a reminder, whole life insurance provides permanent coverage. It comes with a fixed death benefit and level premiums, and it provides a cash value account that can grow over time, tax-deferred.)

Universal life insurance

Universal life insurance is a type of permanent life insurance (similar to traditional whole life insurance). With a universal life policy, the insured person is covered for the duration of their life as long as they pay premiums and fulfill other eligibility requirements. These plans are a great option if you want part of your policy to function as a savings account. Unlike whole life insurance, the premiums and death benefit are flexible rather than fixed. This type of coverage may also come with more fees than whole life insurance. There are a few additional features:

You can withdraw money or borrow against the policy's cash value.
You can earn interest on the cash value component of your policy.
You have some flexibility with your premiums.
You can adjust the death benefit — however, you may be required to take a medical exam to do so.

Variable life insurance

Variable life insurance is a type of coverage that provides more flexibility than other types of life insurance and gives policyholders more say in their premium investments. Unlike whole life insurance, the policyholder must take an active role in deciding on investment options. If you don’t have solid investing knowledge already, this may feel like a big decision.

When you purchase this type of policy, you’ll receive a prospectus laying out all your investment options. The most common way to invest your premiums is in mutual funds. You may also be able to invest in index funds, equities, bonds, or money market funds.

Indexed universal life insurance

Indexed universal life insurance allows you to adjust your premiums to maximize your cash policy’s cash value. This is a type of permanent coverage, which means it lasts your entire life and includes a cash value account that typically grows tax-deferred.

Unlike other types of universal life insurance, an indexed policy ties your cash value account to a specific stock index, such as the S&P 500 or Dow Jones Industrial Average.

Unlike whole life insurance, an indexed policy offers flexible premiums and death benefits. That can provide more potential to grow your money. However, this type of policy can be risky, as the stock market has been known to fluctuate wildly.

Guaranteed life insurance

Guaranteed life insurance is a type of whole life insurance that allows policyholders to get coverage without taking a health exam. If someone with significant health concerns isn’t accepted by other insurance policies, guaranteed life insurance can be a good option. However, keep in mind that guaranteed life insurance policies require higher premium payments. Because these policies are riskier for life insurance companies, they charge higher rates and provide a smaller death benefit.

Final expense life insurance

While many life insurance options include funeral expenses, final expense insurance covers only funeral expenses and other end-of-life costs. Final expense coverage is usually guaranteed (i.e., there’s no required medical exam). However, the premiums are generally expensive despite the limited coverage.

Explore term life insurance with Navient Marketplace

There are key differences between term and whole life insurance policies that boil down to cost, coverage, and cash value benefits. The best option for you will vary depending on your family circumstances and budget.

Once you’ve decided which type of life insurance is right for you, it’s time to start looking at your options. If you’re ready to start shopping for life insurance plans, head to the Marketplace by Navient to get free life insurance quotes. It’s a robust platform that can help you compare and contrast some of the best life insurance companies on the market. And, of course, consider speaking to your life insurance agent to get more guidance.

Life insurance doesn’t have to be complicated. With these resources at your fingertips, it’s easier than ever to protect your family from the unexpected.

Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.