Is Your Term Life Insurance a Waste of Money?

Term life insurance pays your beneficiaries a death benefit if you die during the policy’s specified term. The death benefit can range significantly in size from policy to policy, but it’s possible to buy coverage worth millions of dollars. That money typically gets paid to beneficiaries tax-free and outside of probate, compounding the reward for your loved ones when they need it most.

Yet most term life insurance policies never pay out. That’s because the term usually lasts between 10 and 30 years, and most people outlive their term life coverage, while others stop paying their premiums and let their policies lapse.

While term life insurance coverage can be affordable, especially if you buy early, you won’t get your premiums back unless you also shelled out for a return-of-premium rider to your policy. So is term life insurance worth it or not? Let’s review.

Key Takeaways

• Term life insurance could pay out a substantial sum of money, but only if you die while the policy is still active.
• Although you’re likely to outlive your term life coverage, the premiums are often very low compared to the potential payout and the peace of mind that could give your loved ones. 
• You may opt to extend or convert your coverage to a permanent policy at the end of the term.

How Often Do Term Policies Pay Out?

A 1993 study from Penn State University found that life insurers pay a death benefit to beneficiaries for just 1% of term life policies. This stat appears frequently in books and several places online, but we weren’t able to independently verify it.

The best recent data comes from the American Council of Life Insurers, which releases an annual fact book of industry trends. According to the most recent edition, there were 9.6 million individual life insurance policies purchased in 2023, for a cumulative total of 134 million individual life insurance policies in force. In the same year, 8.5% of individual life insurance policies lapsed or were surrendered, while 2.7 million individual policies resulted in a death benefit payment to beneficiaries. This means 2% of all in-force policies paid out. 

Note that this data does not say whether these were term or permanent life insurance policies; we contacted the American Council of Life Insurers and LIMRA, two organizations representing the life insurance industry, and neither could provide current data on term life insurance payouts.

What Makes Term Life Insurance Worth It?

Despite this low payout rate, term life insurance can be a solid return on your investment, especially if you purchase it when you’re young and healthy. A 30-year term policy with a $500,000 benefit could cost as little as $25 to $29 per month for a 30-year-old in good health. If the premiums are level, meaning they don’t change over time, that means you could pay as little as $9,000 over the entire 30-year term. That’s a fraction of what your beneficiaries could receive if you die during the term.

“The death benefit from an appropriate level of coverage can provide enough for years of financial support for a family,” said Josh Anderson, president and CEO of Eagle Legacy & Financial and an independent life insurance agent. “This money can buy the time needed for a surviving spouse and children to make adjustments to lifestyle, obtain educations, and start new careers.”

A 30-year term policy also dovetails with other significant expenses and debts. Your beneficiaries may rely on that money to continue paying the mortgage or to cover college tuition, student loans, medical debt, or even your funeral expenses (which can push five figures). At the very least, the death benefit could provide a comfortable nest egg to your loved ones in lieu of, or in addition to, your retirement savings.

It’s also important to remember you’re paying for coverage in case the worst happens, not a guaranteed payout. Your car insurance isn’t a waste of money, even if you never get into an accident.

What If I’m Still Worried About Outliving My Policy?

“Many people will look for a new policy to replace their current policy as they near the end of the term,” said Anderson. “For some though, age or health may be considerations as to whether a new policy is affordable or whether they can qualify.”

Conversion involves changing your term life insurance policy into some form of permanent life insurance policy, such as whole life insurance or universal life insurance, without having to take a health exam. These policies will provide you with coverage for the rest of your life, and getting one without a health exam when you’re 20 or 30 years older than when you first got a term policy could be a real benefit.

Important

Permanent life insurance costs significantly more than term life insurance for the same level of benefit. But it includes a cash value component that grows over time and can be tapped while you’re alive.

Another option is extending your term coverage, which some life insurers allow even without forcing you to undergo another medical exam. However, as with permanent life insurance conversion, your premiums are likely to increase. 

“Though the premium will be higher,” Anderson said, “this may still offer a competitive reasonable cost for the insured depending upon their age.”

Additionally, considering how much you’ll save from a term life policy compared to costlier permanent life insurance, during the term you could invest the difference in an index fund and help build a nest egg.

The Bottom Line

Term life insurance can help protect your family from the risk of surviving without your income. That’s the benefit of your policy. Even if it never pays out, you’ve reduced the financial risk to your loved ones.