How Does Term Life Insurance Work?

Term life insurance is super simple and the least expensive way to buy life insurance. You pay premiums every month for the peace of mind that your loved ones will have financial security if you pass away during the term of the policy.

Let’s take an example: John has a term life insurance policy that covers him financially until the age of 55. If John were to die before that age, his beneficiary will receive a predetermined amount, called a payout. For John, the term life insurance offers an assurance that if he dies before 55 years of age, his family will have money to bank on, and one less thing to worry about.

The key feature of this type of life insurance is right in its name — the term or length of the policy. Term life policies are usually offered for periods ranging from 10-30 years or until you turn a specific age such as 65 years. That’s the number of years the policy provides protection for your beneficiary or beneficiaries.

The insurance provider will determine your exact premium based on different factors like age, occupation and overall health. As long as you pay your premiums on time and in full, you’re covered for the entire term.

What happens if I outlive my term?

The best type of life insurance is the one you don’t end up using but is there if you or your loved ones need it! When you outlive your term policy, there are a few options to choose from:

  1. Most likely, you don’t need insurance anymore because you have saved enough to live the rest of your life comfortably and your children are financially independent. Usually, people need life insurance during a specific period of life when they are paying off debts and are responsible for dependents.
  2. If you still have dependents or financial responsibilities and need life insurance, you can reapply for a new term policy. However, your circumstances may have changed since your first policy and you can switch to a new policy that may be better suited for you.
  3. If you are no longer eligible for insurance (this happens when your health has deteriorated to a point that an insurance company wouldn’t want to insure you), you can renew or convert your existing term policy to a whole life policy. When you convert your policy, you may not receive a higher death benefit (payout) but you could potentially save on costs associated with taking out a brand new life insurance policy. Besides, a major benefit of converting is that you will not be required to undergo a medical exam and lifestyle assessment.


Most term life insurance policies come with a built-in rider called a term conversion rider, which allows you to convert your term policy to a permanent policy at the end of the term. It is important to remember that the rider will specify a conversion period, or a time frame during which you have the ability to convert your policy. The conversion period varies from company to company so check your guidelines to ensure you take a decision within that time.

Do you get money back at the end of the term?

No, the funds are forfeit, unless you have what is called a Return of Premium (ROP) term policy, for which the premiums you pay each month are much higher. Think of term insurance like car insurance – if you don’t get in an accident, you don’t get paid.

How does term life insurance payout?

A payout is made when the insured party has died and the beneficiary files a death claim with the insurance company. The default payout option of most term policies is a lump sum check. The amounts received from a life insurance policy are not subject to income tax but the interest accumulated from it may be taxable.

How much term life insurance do you need?

It depends on your personal and financial circumstances. A big part of choosing your policy is taking stock of everything you pay for, or would need to pay for in the future. Calculate your expenses, debts and liabilities, current and future costs of dependents, and end-of-life payments. That’s how much money your dependents will need.

Essentially, you need enough life insurance to replace your income for a given period of time, usually until your kids are out of the house or your mortgage is paid off, but it could be longer. A general rule of thumb is you should be covered for at least 10 times your annual income. If you are the sole provider for your dependants and earn $60,000 a year, you will need a payout that is large enough to replace your income plus some extra to adjust for inflation.