Is Term Life Insurance Worth It? Consider These 8 Pros And Cons

Life insurance is a crucial risk management tool within any comprehensive financial plan, alongside maintaining an emergency fund and holding diversified investments. It provides income protection to your beneficiaries in case of your death. While there are many life insurance products to choose from, term life insurance is the most straightforward, offering financial protection for a limited period. This article explains what term life insurance is, and explores its benefits and drawbacks to help you decide if it’s worth getting one.
What Is Term Life Insurance?
As its name suggests, term life insurance is designed to cover a specific, finite period –the “term”. When you apply for such a policy, you will choose the death benefit amount you need and the duration of coverage. Standard term lengths vary, but they typically include 10, 15, 20, 25, or 30 years. If you die at any time within the defined term, the insurance company pays a predetermined, tax-free lump sum to your beneficiaries.
This tax-advantaged wealth transfer is a massive help, available to your named beneficiaries to use how they see fit. They can use it to cover burial expenses, estate taxes, fund a child’s education, or boost your spouse’s retirement fund.
Lastly, if you outlive the term, the policy simply expires, and the coverage ends with no payout. This is in contrast with permanent life insurance, which provides coverage for your entire life and includes an internal cash value that grows, assuming premiums are paid.
Pros Of Term Life Insurance
Lower Premiums
The most compelling argument for term life insurance is its low cost. Because the policy offers no cash value or savings component, the insurer is only covering mortality risk, and that risk is often during a client’s healthier years (e.g., between ages 30 and 60).
Compare this to permanent policies, which must account for the near-certainty of eventually paying a claim as the coverage lasts a lifetime. Thus, premiums for term life policies are a fraction of the cost of permanent or whole life policies.
Fixed Costs
In nearly all cases, the premiums remain the same for the duration of a term life policy. For example, when you take out a 20-year policy, you know precisely what the cost of your insurance will be for the next two decades.
This makes it easier to plan for and fit into your monthly budget. It also lessens the possibility of compromising on other savings goals, such as building your emergency fund, making 401(k) contributions, or saving for a down payment on a house.
Simplicity
The contract is easy to understand. It’s very straightforward: You pay a premium, and you are covered for the contract period. The death benefit is only paid out if you pass away within the term.
There are no complicated riders, investment accounts, or loans to manage, which are typical of permanent life insurance policies.
Targeted Protection
You can view the term structure not as a limitation, but as a feature. You can use a term life insurance policy to align with your financial obligations or address critical financial vulnerabilities, ensuring your beneficiaries are protected.
For example, if you have a 30-year mortgage, you can also get a 30-year term life insurance policy to coincide with it. By matching the policy term to the mortgage, you can ensure that your family will be able to pay off the house and not be forced to move out if you die. Once the term expires, the debt is also likely paid off, removing the need for income replacement.
You can apply this same principle to having dependent children. When they are grown and financially independent, it may be economically inefficient to continue paying for insurance when there is no longer a dependent to protect.
Increased Savings Potential
Because term premiums are significantly lower than permanent policy premiums, you can take the difference in cost and invest it in a separate vehicle, say an index fund within a 401(k) or IRA. This is what’s called the BTID strategy (“buy term, invest the difference”).
For example, if a permanent policy costs $3,000 annually and a comparable term policy costs $500, you have $2,500 per year to invest. Over 20 or 30 years, that invested sum, compounded at market rates, often yields a total retirement nest egg far larger than the internal cash value of a permanent policy. All while having the necessary term coverage in place.
You’d also have more control and transparency if you invest it yourself.
Cons Of Term Life Insurance
Use-It-Or-Lose-It
This is the most obvious disadvantage of term life insurance. The policy has an expiration date. If you are still alive when the term ends, the policy terminates, and all premiums paid are forfeited.
Remember that with a standard term policy, the premiums you paid over the life of the policy are not recoverable. They were the cost of the risk transfer, similar to paying for a car insurance that you never use. Some companies offer specialized Return of Premium (ROP) term life policies, but they are more expensive, with the higher initial premium often negating the refund’s benefit.
No Cash Value Accumulation
Term life insurance is not an asset. It builds no equity or savings component. It is purely an expense, albeit one designed to cover mortality risk. You cannot borrow against it or surrender it for cash.
If you want a policy that offers some liquidity and cash value, consider whole life insurance.
High Renewal Costs
As you age, the probability of death increases. While the need for insurance typically decreases as wealth builds, you may still need it for estate planning, business succession, or special needs planning.
If a term policy lapses, say at age 65, and you want to renew coverage, buy a new policy, or convert to a permanent one, premiums will likely be higher because you are older, which means higher mortality risks. At worst, you may be deemed uninsurable, which hinders you from obtaining a new policy altogether.
Final Thoughts: Is Term Life Insurance Worth It?
Term life insurance is an effective tool for providing financial security to your loved ones when your income is critical to their well-being. It is particularly ideal if you have major financial obligations, such as a mortgage, or dependents, like young children or a non-working spouse.
It may also be worth it if you are budget-conscious but still want to have adequate insurance coverage.