Term life insurance definition

What is a term life insurance policy? Term life insurance is, in essence, a contract between you (i.e., the policyholder) and a life insurance company (i.e., the insurer) for a specific number of years (i.e., the term). Sounds pretty simple, right? 

A term life insurance policy provides financial protection for a number of years—that’s the “term” part of “term life insurance.” If you’re approved, you could choose a policy length of 10, 20, or 30 years, though some companies offer more variations, such as 5- or 15-year term lengths. 

If you, the policyholder, die during the length of the policy term, the company will issue a death benefit, or payout, to your beneficiaries; basically the people who will receive the payout. If you don’t die during the length of your term, you may be presented with options. You may be allowed to renew your policy or possibly switch coverage. 

Other types of term life insurance—definitions

Level term life insurance 

Level term life insurance is a term life insurance policy that has a level death benefit for the entirety of the term. As in, your beneficiaries will be paid the same amount whether you die three years into your 20-year policy, or at the very end of it.

But here’s something to note: this type of life insurance typically refers to a policy where the death benefit stays the same. People sometimes also refer to policies where premiums remain the same as “level term life insurance.” Those are more accurately referred to as “level premium term life insurance,” though, and this is confusing, some products may use elements of both under the title “level term life insurance.” Fun stuff, right?

‍Annual renewable term

Many companies offer term lengths in periods of 10, 20, or 30 years. But annual renewable term policies are a type of term life insurance policy that renews every year. How does that work exactly? Well, you typically have a period of insurability. That basically means that’s the amount of time (in years) you’re able to renew without reapplying or having to take a medical exam.

Sounds pretty good, right? Well, your premiums will rise with each year you renew. Meanwhile the death benefit, the payout, will remain the same. Annual renewable term policies may be great for people who want to cover even more short-term debts, or possibly people who are between jobs. 

‍Decreasing term

A decreasing term life insurance policy is one where the coverage (i.e., death benefit) decreases over time. Meaning your beneficiaries’ payout will be less and less the longer the policy term goes. Often these policies are for covering specific financial needs, such as a loan or debt. For example, if you want your mortgage to be covered, you might not need a full $1 million death benefit in 25 years (considering you continue to pay your mortgage). 

‍Increasing term

Similar in concept to decreasing term life insurance, but think the opposite. Policyholders typically pay more than level term life insurance, but the death benefit increases over the length of the policy. Why would someone want that? For a number of reasons.

For example, you may have a policy that comes with $500,000 in coverage on a 30-year policy. But that amount may not have the same buying power at the end of your term as it would at the beginning. Plus, you can increase your coverage amount without any additional underwriting. 

Guaranteed issue

Guaranteed issue life insurance is a term life insurance policy type that’s, well, guaranteed. Meaning you can’t be denied coverage. It came about as a way to offer insurance to people who typically couldn’t receive coverage from other companies, such as people with chronic illnesses. Coverage for guaranteed issue tends to be significantly lower than other term life policy types, however.

‍Return-of-premium

Return-of-premium term life insurance is a policy type that involves a reimbursement of premiums paid during the length of the term. Sometimes companies may offer this option as a rider (i.e., add-on) to your policy while others offer it as an independent policy type.

Is term life insurance worth it?

This is a question that only you can answer. But a key point in all of this is—is there anyone in your life that’s financially dependent on you or would be affected financially by your death? If the answer to this question is “yes” then a term life insurance policy is probably worth it. Whether it’s your spouse, partner, kids, parents or even a business partner, there’s plenty of people who might be financially dependent on you or affected by your death. A spouse may struggle to continue to pay the mortgage or childcare costs. If your parents are co-signers on your student loans, they may be on the hook for repayment if you were to die. But let’s say you’re single and don’t have to worry about those above examples. If you have a roommate, how would they continue to pay the rent with you suddenly being gone? A term life insurance policy can cover that too. If you can consider one person financially connected to you, it might be time to consider applying for a policy.

How much life insurance do I need?

So you’ve considered who might be financially affected by your death, but you also have to think about the right amount of coverage. The question, “how much life insurance do I need?” can be surprisingly abstract. We have a full breakdown here to learn more but some things to keep in mind: you want to consider current and any potential future financial obligations. Things like tuition, mortgages, car loans, etc. are all important things to think about when looking at finances. Then you’ll want to think about how long you want your term to last. At Wysh, we offer term lengths that start at 10 years, so if you’re 18 you can have a policy up to 65. Once you’ve got your potential term length, think about who should be a beneficiary on your policy. Will it be your spouse, your adult children, your minor children’s guardians? With these in mind, it’s important to have continuing conversations with your loved ones. If you want your spouse to be a beneficiary, talk with them about your family’s financial needs and your agreed-upon expectations for how the money should be utilized. 

How do I figure out how much life insurance I need?

Term life insurance reimagined

Now that you’re a term life insurance master, the next step (after speaking with your loved ones) is to explore the options that are out there in the term life insurance policy marketplace. While you’re here, check out Wysh and our free Wysh Builder tool. The Wysh Builder lets you mix and match financial needs to craft a policy that’s perfect just for you and your needs. You don’t need to apply—just head on over to the Wysh Builder now to see how easy and powerful it really is. Once you do that, the next best thing to do is to apply. The best time to apply for a Wysh policy was yesterday. The next best time to apply for one is now. Take advantage of the time while you’ve got it. We’ll see you on the other side.

TL; DR

• Term life insurance definition: a term life insurance policy is a contract between you and an insurance company where the company provides financial protection for a set number of years. If you die during the contract term, the company will issue a death benefit, or payout, to your listed beneficiaries.
• There are a number of different term life insurance policy types, such as Level Term Life Insurance, Annual Renewable Term Life, Decreasing Term Life, Increasing Term Life, Guaranteed Issue and Return-of-Premium Term Life Insurance. 
• A term life insurance policy is worth it if there are people who are either financially dependent on you or would be financially affected by your death. People like your spouse, partner, parents, children, even roommate and/or business partners can be strong considerations for beneficiaries. 
• Don’t get a term life insurance policy with too much or too little coverage. Have conversations with your loved ones and follow our guide to determine the right amount of coverage. 

Our Wysh Builder tool is free, easy to use and you don’t have to apply to visualize the perfect policy for you.