Term Life Insurance Calculator

Buying life insurance now provides a financial safety net for your dependents later if you’re not around to take care of them. After you’re gone, your family can use the proceeds to cover funeral costs, mortgage payments, college tuition and other expenses.

There are two main types of life insurance:

Term life insurance is the easiest to understand and has the lowest prices.

Permanent insurance is more complex and tends to cost more than term, but it offers additional benefits. Whole life is the most well-known and simplest form of permanent life insurance. Other kinds of permanent life insurance include universal, variable and variable universal.

Term life insurance explained

Term life insurance provides coverage for a certain time period. It’s often called “pure life insurance” because it’s designed only to protect your dependents in case you die prematurely. If you have a term policy and die within the term, your beneficiaries receive the payout. The policy has no other value.

You choose the term when you buy the policy. Common terms are 10, 20 or 30 years. With most policies, the payout, called the death benefit, and the cost, or premium, stay the same throughout the term.

When you shop for term life:

Choose a term that coincides with the years you’ll be paying the bills and want life insurance coverage in case you die early.
Buy an amount your family would need if you were no longer there to provide for them. The payout could replace your income and help your family pay for services you perform now, such as child care.
Ideally, your family’s need for life insurance will end around the time the term expires: Your kids will be on their own, you’ll have paid off your house, and you’ll have plenty of money in savings to serve as a financial safety net.

All of the best life insurance companies sell term life, so it’s easy to find rates.

Whole life insurance explained
Like all permanent life insurance policies, whole life provides lifelong coverage and includes an investment component known as the policy’s cash value. The cash value grows slowly, tax-deferred, meaning you won’t pay taxes on its gains while they’re accumulating.

You can borrow money against the account or surrender the policy for the cash. But if you don’t repay policy loans with interest, you’ll reduce your death benefit, and if you surrender the policy, you’ll no longer have coverage.

Like all permanent life insurance policies, whole life provides lifelong coverage and includes an investment component.

Although it’s more complicated than term life insurance, whole life is the most straightforward form of permanent life insurance. Here’s why:

The premium remains the same for as long as you live
The death benefit is guaranteed
The cash value account grows at a guaranteed rate
Some whole life policies can also earn annual dividends, a portion of the insurer’s financial surplus. You can take the dividends in cash, leave them on deposit to earn interest or use them to decrease your premium, repay policy loans or buy additional coverage. Dividends are not guaranteed.
Cost comparison
Term life insurance is cheap because it’s temporary and has no cash value; in most cases, your family won’t receive a payout because you’ll live to the end of the term. Whole life insurance premiums are much higher because the coverage lasts for a lifetime, and the policy has cash value, with a guaranteed rate of investment return on a portion of the money that you pay.

Below are price comparisons between term life and whole life insurance. We used 20-year and 30-year term life policies because no apples-to-apples comparison is possible for the length of term life to whole life.

Term life insurance

Term life insurance or term assurance is life insurance that provides coverage at a fixed rate of payments for a limited period of time, the relevant term. After that period expires, coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or potentially obtain further coverage with different payments or conditions. If the life insured dies during the term, the death benefit will be paid to the beneficiary. Term insurance is typically the least expensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis over a specific period of time.

Term life insurance can be contrasted to permanent life insurance such as whole life, universal life, and variable universal life, which guarantee coverage at fixed premiums for the lifetime of the covered individual unless the policy is allowed to lapse. Term insurance is not generally used for estate planning needs or charitable giving strategies but is used for pure income replacement needs for an individual. Term insurance functions in a manner similar to most other types of insurance in that it satisfies claims against what is insured if the premiums are up to date and the contract has not expired and does not provide for a return of premium dollars if no claims are filed. As an example, auto insurance will satisfy claims against the insured in the event of an accident and a homeowner policy will satisfy claims against the home if it is damaged or destroyed, for example, by fire. Whether or not these events will occur is uncertain. If the policyholder discontinues coverage because he or she has sold the insured car or home, the insurance company will not refund the full premium.
Usage
Because term life insurance is a pure death benefit, its primary use is to provide coverage of financial responsibilities for the insured or his or her beneficiaries. Such responsibilities may include, but are not limited to, consumer debt, dependent care, university education for dependents, funeral costs, and mortgages. Term life insurance may be chosen in favor of permanent life insurance because term insurance is usually much less expensive[1] (depending on the length of the term), even if the applicant is an everyday smoker. For example, an individual might choose to obtain a policy whose term expires near his or her retirement age based on the premise that, by the time the individual retires, he or she would have amassed sufficient funds in retirement savings to provide financial security for the claims.
Annual renewable term
The simplest form of term life insurance is for a term of one year. The death benefit would be paid by the insurance company if the insured died during the one-year term, while no benefit is paid if the insured dies one day after the last day of the one-year term. The premium paid is then based on the expected probability of the insured dying in that one year.

Because the likelihood of dying in the next year is low for anyone that the insurer would accept for the coverage, purchase of only one year of coverage is rare.

One of the main challenges to renewal experienced with some of these policies is requiring proof of insurability. For instance the insured could acquire a terminal illness within the term, but not actually die until after the term expires. Because of the terminal illness, the purchaser would likely be uninsurable after the expiration of the initial term, and would be unable to renew the policy or purchase a new one.

Some policies offer a feature called guaranteed reinsurability that allows the insured to renew without proof of insurability.

A version of term insurance which is commonly purchased is annual renewable term (ART). In this form, the premium is paid for one year of coverage, but the policy is guaranteed to be able to be continued each year for a given period of years. This period varies from 10 to 30 years, or occasionally until age 95. As the insured ages, the premiums increase with each renewal period, eventually becoming financially inviable as the rates for a policy would eventually exceed the cost of a permanent policy. In this form the premium is slightly higher than for a single year’s coverage, but the chances of the benefit being paid are much higher.

Basic Pricing Assumptions For Annual Renewable Term Life Insurance

Actuarially, there are three basic pricing assumptions that go into every type of life insurance:
Mortality— How many individuals will die in a given year using a large sample size— EG, The 1980 CSO Mortality Table or the newer 2001 CSO Mortality Table which are compiled by the FDC. Most life insurance companies use their own propriety mortality experience based on their own internal set of statistics. The CSO Mortality Tables reflect total population figures within the US and do not reflect how a life insurance company screens its applicants for good health during the policy underwriting phase of the policy issue process. Corporate mortality will most likely always be more favorable than CSO tables as a result. In rare cases some companies have recently increased policy mortality costs on existing business segments due to much lower than anticipated investment returns
Assumed Net Investment Return— EG Current industry average return of 5.5% Annual Yield by the life insurance company. In the early 1980’s interest/return assumptions were well over 10% to be sustained over the life of the policy.
Internal Administrative Expenses— Generally these are propriety figures which include, mainly, policy acquisition costs( sales commissions to selling agents and brokers),and general home office expenses. See Actuarial Standards Board— Pricing of Life Insurance Products 2016
These pricing assumptions are universal among the various types of individual life insurance policies. It’s important to understand these components when considering term life insurance because there is no cash accumulation component inherent to this type of policy. Buyers of this type of insurance typically seek the maximum death benefit component with the lowest possible premium. See the 2017 Insurance Barometer Study-LIMRA and LifeHappens.org
In the competitive term life insurance market the premium range, for similar policies of the same duration, is quite small. All of the above referenced variations of term life policies are derived from these basic components.
Level term life insurance
More common than annual renewable term insurance is guaranteed level premium term life insurance, where the premium is guaranteed to be the same for a given period of years. The most common terms are 10, 15, 20, and 30 years.

In this form, the premium paid each year remains the same for the duration of the contract. This cost is based on the summed cost of each year’s annual renewable term rates, with a time value of money adjustment made by the insurer. Thus, the longer the period of time during which the premium remains level, the higher the premium amount. This relationship exists because the older, more expensive to insure years are averaged, by the insurance company, into the premium amount computed at the time the policy is issued.

Most level term programs include a renewal option, and allow the insured person to renew the policy for a maximum guaranteed rate if the insured period needs to be extended. The renewal may or may not be guaranteed, and the insured person should review the contract to determine whether evidence of insurability is required to renew the policy. Typically, this clause is invoked only if the health of the insured deteriorates significantly during the term, and poor health would prevent the individual from being able to provide proof of insurability.

Most term life policies include an option to convert the term life policy to a Universal Life or Whole Life policy. This option can be useful to a person who acquired the term life policy with a preferred rating class and later is diagnosed with a condition that would make it difficult to qualify for a new term policy. The new policy is issued at the rate class of the original term policy. This right to convert may not extend to the end of the Term Life policy. The right may extend a fixed number of years or to a specified age, such as convertible to age seventy.
Return Premium Term life insurance
A form of term life insurance coverage that provides a return of some of the premiums paid during the policy term if the insured person outlives the duration of the term life insurance policy.

For example, if an individual owns a 10-year return of premium term life insurance plan and the 10-year term has expired, the premiums paid by the owner will be returned, less any fees and expenses which the life insurance company retains. Usually, a return premium policy returns a majority of the paid premiums if the insured person outlives the policy term.

The premiums for a return premium term life plan are usually much higher than for a regular level term life insurance policy, since the insurer needs to make money by using the premiums as an interest free loan, rather than as a non-returnable premium.
Payout likelihood and cost difference
Both term insurance and permanent insurance use the same mortality tables for calculating the cost of insurance, and provide a death benefit which is income tax free. However, the premium costs for term insurance are substantially lower than those for permanent insurance.

The reason the costs are substantially lower is that term programs may expire without paying out, while permanent programs must always pay out eventually. To address this, some permanent programs have built in cash accumulation vehicles to force the insured to «self-insure», making the programs many times more expensive.

Other permanent life insurance policies do not have built in cash values. In these cases, the policy owner may have the option of paying additional premium in the early years of the policy to create a tax deferred cash value. If the insured person dies and the policy has a cash value, the cash value is often paid out tax free, in addition to the policy face amount.
Simplified Issue Insurance
A scaled back underwriting process that is simplified. Coverage amounts are lower than traditional fully underwritten policies. Simplified issue policies typically do not require a medical exam and have less application questions to answer. Many of these policies can be approved within several days.
Guaranteed Issue Insurance
A life insurance policy that is guaranteed approval. Coverage amounts will be lower than traditional policies. Premiums will be considerably higher. Since there are no medical questions and everyone is approved, these policies will have a waiting period before benefits are paid out. If the insured dies during the initial waiting period, only premiums plus interest will be returned. Once the waiting period has been satisfied, the full death benefit will be paid out to the beneficiary.