How does term life insurance work?

“Everybody has their own personal reason why they buy life insurance protection,” says Ryan Schwingler, a life insurance products consultant at Thrivent. When you’re looking for the right fit, having a lot of options can be helpful, but also daunting to sort through.

It might help to know that in many situations, term life insurance is a good option to consider. Because it’s for a term, this type of insurance often comes at a lower cost. (More on that below.)

While permanent insurance typically lasts for your lifetime, as long as premiums are paid, term insurance covers you for “a specified period of time,” or term, Schwingler explains. You can choose how long you want coverage, with a variety of ranges available. But term insurance is ultimately more flexible than just the time frame, Schwingler adds. And that’s another reason to give it a look.

One example is if you have a need for protection that will go away after a certain time. Say you have 27 years left on a home mortgage, Schwingler says. A 30-year term life insurance contract ensures that your family can make those payments even if you’re gone. Likewise, you might choose a contract to last through your children’s growing up years.

Premiums that are typically lower than permanent life insurance is another reason people might choose term insurance. The trade-off is that a term insurance contract does not accumulate a cash value that you can cash in or borrow against while you’re living, as permanent insurance usually does.¹ You could think of term insurance being like renting a home, while permanent insurance is more like buying a home and building equity in it.

It depends on what you want to protect and how long that need will exist. One need to consider, is how to replace your paycheck if you’re gone. “Income replacement tends to be overlooked,” Schwingler says, but it can be important to a family over the longer haul, or for a partner, even in a couple where both people are retired.

You can shorten your term by canceling your contract partway through, Schwingler says. There is no penalty. You may be able to extend your coverage by purchasing a new contract at expiration time, depending on your health. If you are approved for another term life contract, you will have higher premiums in your next term, though, because of your increased age. Your insurance provider may allow you to reduce your death benefit throughout the life of the contract, which could reduce the cost of coverage.

Another way to extend coverage is to choose a conversion option when you buy your term insurance contract. Adding that option will add to your cost, but you’ll be able to convert your term contract into a permanent life insurance contract if you want to later on, even if you’ve had changes to your health.

Want to learn more about term life insurance? Read more about term life insurance or talk to your financial advisor.