What is term life insurance & how does it work?

Many financial decisions you make are motivated by the people you love and care for. It’s reassuring to know that while you can’t predict the future, you can prepare for it. And life insurance is one way to do that.

Choosing the type of life insurance that’s right for you starts with understanding what’s available. While term life insurance is the most affordable, you may not know what it is or how it works. Read on and discover how it may be a good fit for your life.

Term life insurance covers you for a specified period, called a term. If you die during that timeframe and have made scheduled premium payments, the insurance company pays a death benefit to the loved ones you designate. You can name a beneficiary or beneficiaries when you purchase the contract and make updates as needed. For instance, you may update beneficiaries when you get married or divorced, have a baby or adopt a child.

You choose how long you want coverage and the value of the contract when you purchase it. Depending on the policy you choose, your premium won’t change for the term of the contract.

Based on your age and stage in life, you can choose from 10-, 15-, 20- and 30-year terms. It’s important to determine what you want to protect and how long that need will last. For instance, you may want to choose a term that corresponds to the duration of your home loan to ensure your family won’t need to relocate if you suddenly pass away.

Term life insurance is basic coverage with premiums that are lower than other types of life insurance. It protects your loved ones for a term you specify. Term coverage may be smart at a time in your life when you need protection, but you aren’t in a position to buy permanent life insurance.

It may make the most sense when:

• You’re young.
• Your family is growing or you have children living at home.
• You’re starting a business.

You may find 10-, 15-, 20- or 30-year contracts that will suit your needs depending on the circumstance of your life. The terms available depend on the insurance provider.

A term contract tends to be more affordable, providing a larger amount of coverage at a lower initial cost than permanent insurance. However, it doesn’t build cash value that could potentially be used during your lifetime to supplement retirement income or help pay college costs. Consider permanent life insurance if you want lifelong protection.

Term insurance covers you for a specific period of time at less cost, while permanent insurance typically lasts for your lifetime and builds cash value. Cash value is a reserve in your contract that grows over time as long as premium payments are made.

You can think of term life insurance as temporary coverage while permanent life insurance offers lifetime protection. In exchange for the lifelong coverage and cash value that comes with permanent life insurance, you can generally expect to pay more.

Explore the differences as well as pros and cons of each > Term vs. whole life insurance: Everything you need to know.

Yes, you can. Instead of letting your term life insurance policy expire, you may be able to exchange it for a permanent policy without needing a new medical exam. Converting your term policy to a permanent policy allows you to extend your life insurance coverage but be aware the new policy’s premiums will likely be higher. After switching to the permanent policy, protection will last your entire life and the contract has the potential to build cash value as long as premiums are paid.

Read more about how a term-to-permanent life insurance contract conversion works.

Depending on the type of term life insurance you buy, you may be able to extend your contract when the term is over. Why is that important? As your life circumstances change, you may find you need protection for longer than originally planned. For example, you might start a business, or you take on the responsibility of caring for extended family or other loved ones.

Renewability is a topic to discuss with your financial advisor as well as which type of life insurance may be right for you if you anticipate major life changes during the term of your policy.

The answer to how much term life insurance you may need is different for everyone. If you want to do some quick math, you can use the general rule of thumb of 10 times your annual salary.

When considering an amount that’s right for you, think about your goals and income potential, how long your loved ones may need financial support and your current liabilities, such as a home loan, student loans, credit card debt and other obligations. Also, take into account future education expenses for your children and your hopes for leaving a legacy.

Thrivent’s life insurance calculator can help you calculate your specific life insurance needs.

If you’re exploring a need for life insurance, now might be the right time for you—no matter what your age. There are several factors that determine the cost of life insurance. As a general rule, the younger and healthier you are, the lower your rates will be.

There’s a sense of satisfaction that comes with knowing you have done your best to protect those you love. Consider seven life events that could affect your life insurance coverage.

Protecting your loved ones is a personal decision, but you may want to seek professional guidance. A financial advisor can discuss the benefits of both term and permanent life insurance contracts with you in greater detail to see if they’re a good fit for your financial strategy.