It’s a contract. At its most basic level, a term life policy is an agreement between the person who owns the policy (the owner) and an insurance company: The owner agree to pay a premium for a specific term (usually between 10 and 30 years); in return, the insurance company promises to pay a specific death benefit in cash to someone (a beneficiary) upon the death of someone else (the insured). That benefit is usually tax-free (unless the premiums are paid with pre-tax dollars).

There’s an application process. You may have seen or heard ads that say things like, “A male non-smoker in his 30s can get a 20-year $500,000 term policy for under $30 a month.” Some people can get that much coverage for under $30 – but it’s not automatic. Before they give you a policy, the provider needs to assess how much of a risk you are to insure. This is called the “underwriting” process. They’ll typically ask for a medical exam to evaluate your health, and want to know more about your occupation, lifestyle, and other things. Certain hobbies like scuba diving are deemed risky to your health, and that may raise rates. Likewise, dangerous occupational environments – for example, an oil rig – also may raise your rates.

You need to choose a term length. One of the biggest questions to ask yourself is, “How long do I need coverage for?” If you have children, a popular rule of thumb is to choose a term long enough to see them out of the house and through college. The longer your term, the more you’ll typically pay each month for a given coverage amount. Nevertheless, it usually pays to err on side of getting a longer-term policy than a shorter one because you just never know what the future holds and it is generally easier to get insurance while you are younger and in good health.

Decide how much of a death benefit you want. You should consider getting enough coverage to care for your family’s needs if you’re not there to support them; in section 3 we’ll tell you a few different ways to figure out how much that is. Whatever coverage amount you need, it will likely cost less than you thought: A recent survey found that 44 percent of millennials believe that life insurance is at least five times more expensive than the actual cost.1

Name your beneficiaries. Who gets the benefit when you die? It doesn’t all have to go to one person. For example, you could give 50% to your spouse and divide the rest between your adult children. And while beneficiaries are typically family, they don’t have to be. You could choose to leave some or all of your benefits to a trust, a charitable organization, or even a friend.

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The different types of term policies you can buy

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As you shop around and start talking to companies or insurance agents you may hear about different kinds of term policies. They all provide a specific benefit over a specific term but may have very different bells and whistles and costs.

• Level premium: Also called level term; this is the simplest, most common type of policy: Your premium stays the same for the entire term.

• Yearly renewable term : Also called an annual renewable term. This policy covers you for a year at a time, with an option to renew without a medical exam for the duration of the term – but at a higher cost each year. Compared to a level term policy, your premiums will be slightly lower at first, but over a full 10, 20, or 30-year term you will pay more than you would with a level premium policy.

• Return of premium: This type of term policy actually pays back all or a portion of your premiums if you live to the end of the term. What’s the catch? Your premiums could be 2-4 times higher than with a level term policy. Also, if your financial status changes and you let the policy lapse you may only get a portion of your premiums returned – or nothing at all.

• Guaranteed issue: These policies are easier to get because they don’t require a medical exam and only ask a few simple health questions at most. This also means that the insurance company has to assume that you are a risky prospect who has health issues, so your premiums may be much higher than they otherwise would be. Also, the policy might not pay a full death benefit for the first few years of coverage. If you have health issues but are able to manage them, it will usually be worth your while to get a conventional term life policy that is underwritten (i.e., requires a medical exam).

 

One more thing to look for in a term policy: Convertibility

 

Convertibility is a policy provision that lets you change your term insurance into a permanent whole life policy later on – without having to get a new medical exam. It’s a feature offered by almost all major insurance companies that let you change your type of life insurance. Guardian, for example, lets you convert level term insurance coverage at any point in the first five years to a permanent life policy – and even offers an optional Extended Conversion Rider which lets you do so for the duration of the policy.

Why would you convert to a whole life policy from term? If you’ve had a serious health problem – for example, a heart attack – it may be very difficult to get another policy. Another reason: you’re attracted to the cash value component of a whole life policy. Or maybe you want permanent life-long coverage. A term policy may well be your best choice now, but things can change.

Look for an insurer that offers the option to convert from term to a whole life policy without taking another medical exam, which would likely increase your cost. The chart below lists some of the important differences between a term life policy and whole life insurance, but if you want to find out more, talk to an insurance agent or financial professional.

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RETURN OF PREMIUM (ROP)

 

ROP term life insurance is a type of policy that returns the premiums paid by the policyholder if they outlive the term of the policy. This can be a great option for those who want ensure that their loved ones are financially protected in case of their untimely death, but also want to have the option of receiving their premiums back if they don't end up needing the coverage. It's important to note that ROP term life insurance policies tend to have higher premiums than traditional term life insurance policies.