Is Term Life Insurance a Waste if You Outlive Your Policy?

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Don’t make a misinformed choice about whether term life insurance is worth paying for.

Key points

• Term life insurance pays out a death benefit only if the policyholder dies during the coverage period.
• It’s possible to pay premiums for decades and for no death benefit to be paid in the end.
• If no benefits are paid out, that doesn’t make term life coverage a waste of money.

Term life insurance is a popular type of life insurance policy. Unlike whole life insurance, a term life policy isn’t meant to provide coverage indefinitely. Instead, the policyholder’s beneficiaries are protected from financial loss for a limited time period. If a term policy lasts for 30 years, then the policy would pay out the death benefit only if the covered person died during that time. If they didn’t, the coverage would end and no death benefit would ever be paid out.

It can be painful to imagine paying premiums for a few decades, only to end up with nothing to show for it in the end. As a result, many people end up wondering if term life insurance is a waste of money in the event the covered person outlives their term and the life insurance ends with no payout.

In reality, however, this is an ideal outcome and one most people should hope for.

Term life insurance isn’t a waste even if the death benefit doesn’t pay out

When a person buys term life insurance, they don’t pay premiums for the purpose of ensuring a death benefit pays out. The money isn’t being sent to the insurer in exchange for a future promise that a large lump sum will always go to family members.

Instead, the premiums buy protection in case the unexpected happens. The money is paid out for the purpose of transferring the risk of an untimely death to the insurance company, rather than to loved ones of family members.

Insurers actually review health data from the policyholder, as well as actuarial projections for life expectancy, and set prices based on the likelihood of the policyholder dying during the covered term. If it is likely the insurer will have to pay out the death benefit, then the would-be policyholder might be denied coverage entirely or asked to pay higher premiums, which could make the cost of the policy prohibitive.

For many people who qualify for affordable coverage, the assumption is no death benefit will ever pay out. The coverage is in place in case the worst happens, but neither the insurer nor the policyholder should have an expectation the death benefit will be paid. This doesn’t make the coverage a waste when the policy ends, any more than it’s a waste of money to have car insurance but not get into an accident.

By contrast, with whole life insurance, the payout of the death benefit is assumed to be a given, since the policy is supposed to remain in effect indefinitely as long as it’s not canceled and the premiums are paid. But whole life policies are much more expensive because insurers know they’ll eventually need to provide beneficiaries with a large lump sum. Ironically, for most people, it’s paying these high premiums indefinitely that ends up being a waste, since for most people there comes a time when no insurance coverage is actually needed.

Who should buy term life insurance coverage?

For most people, term life insurance coverage is a good investment — even if the policy never pays out, and is unlikely ever to do so. Anyone who has loved ones depending on them for goods or services should likely pay the affordable price necessary to protect their family from financial disaster in the event a surprising untimely death occurs. The price of peace of mind is well worth it.