What Is Term Life Insurance?

Rapid Read On

You’ve heard you should get life insurance, and just like getting back to the gym, you’ve been putting it off. (And for good reason. Who in their right mind actually wants to do burpees?)

You may have heard that term life insurance is the best option, but that leaves you with a burning question: What exactly is it?

If you already know the answer, you can use this form to compare quotes.

But if you’re not sure, don’t worry. It’s not as complicated as you might think. I’ll spill the beans about term life insurance so you can protect your family’s future and finally cross “get life insurance” off your to-do list.

Here’s a Quick Look at Term Life Insurance:

  • It guarantees a death benefit if you (the insured) die during a period of time that you specify—the term.
  • If you die after the specified term, the insurance company doesn’t pay.
  • It’s called “pure life insurance” because it has no cash value like a whole life insurance policy.
  • It’s a much better deal than whole life because you’re only paying for life insurance—not some wonky cash value account that grows slowly.
  • With the more-affordable cost of premiums, you can invest the savings in good growth stock mutual funds and build real wealth.

Here’s How It Works: The insurance company looks at your age, health, death benefit amount, and term length to calculate the cost of your policy. Then you make premium payments for the length of the policy.

Let’s Use Our Friend Steve as an Example:

✅ He’s a healthy, nonsmoking 30 year-old.

✅ He makes $50,000 a year.

✅ Steve’s death benefit is $500,000 (because you need coverage worth 10–12 times your yearly income).

✅ His term length is 20 years.

If Steve dies (sorry bro) before his 20-year term is over, the $500,000 (his term life insurance benefit) will go to his beneficiaries (his wife and two kids).

Types of Term Life Insurance:

Level Premium: It offers a flat premium rate for the entire term (I recommend a term of 15–20 years).

Term 80 (Annual Renewable): The premiums will increase over time.

Decreasing: The payout decreases over time (along with your debt), but your premium stays the same. It makes no sense.

Return of Premium: It gives you back the cost of the policy if you survive the term, but it's not worth the huge premiums you'll pay. 

Guaranteed or Simplified: It’s where you get covered without having to go through a medical exam (which is great if you qualify).

Convertible: (No flashy cars involved, sadly.) It allows you convert to whole life down the line, but your premium jumps way up.

Group: This employee benefit is worth keeping if it’s free. But it’s usually not enough coverage on its own, and it doesn’t move jobs with you.

Here’s the Meat and Potatoes:

You want to get level premium term life insurance with coverage that’s 10–12 times your income and a term that’s 15–20 years in length.

Make sure your family will be taken care of if you die by getting term life insurance.

Next Steps

Learn the Smarter Way to Do Life Insurance

Life insurance can feel freakin’ confusing. Sign up to get Ramsey’s no-nonsense advice, including free access to Dave’s video from Financial Peace University (normally $80), plus guides and resources sent right to your inbox.

By submitting this form you are agreeing to the Ramsey Solutions Terms of Use and Privacy Policy.