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How long should my term life policy last?
Start by asking yourself how many years your loved ones will be financially dependent upon you.
The goal of term life insurance is to protect your family and leave them with a financial safety net. When you’re choosing a term length, weigh your financial obligations and the costs of the policy.
Which term length should I choose?
Term life insurance offers protection for a set period of time, such as 10, 15, 20, 25 or 30 years. If you die during your term, your beneficiaries will get the death benefit. If you outlive your term, your beneficiaries won’t receive the proceeds and you’ll no longer have life insurance coverage.
The most popular terms are 20 and 30 years — but the best length for you will come down to your situation.
To decide on a term length, think about your financial needs and obligations and how long they’ll last. Then, purchase a policy that meets your longest — or biggest — obligation.
Factor in the following:
- Years left on your mortgage. Consider a term length that matches the time you have left on your mortgage. So, if you’ve just bought a house with a 20-year mortgage, you might take out a 20-year term life policy. That way, if you pass away during that period, your beneficiaries won’t be burdened with the payments.
- Years until your children are independent. If you’re a parent, think about how long your kids will be dependent upon you and use that timeframe to determine your term length. Many parents choose to buy a policy that covers their kids through college and takes care of their tuition and living costs. If your children are young, that may translate to a 20- or 25-year policy.
- Years until your debt has been paid off. Do you have any outstanding debt? Unfortunately, your debt doesn’t die with you, so you might want your policy to kick in to cover that debt if you die prematurely. When you’re doing the math, think about how long it would take you to pay down those balances and choose a term accordingly.
- Years until you retire. As you get closer to retiring, you’ll check off financial obligations. You might pay off your house, settle your debts and have children who are grown up. If you have savings stashed away and you’re primarily purchasing term life insurance to replace your income when you die, you might not need it once you retire. For example, if you’re a 50-year-old who’s on track to retire at 65, a 15-year policy should suffice.
If your longest financial obligation falls between two term periods, round up. That way, you’ll have a financial cushion and peace of mind knowing your beneficiaries won’t be burdened in the event of your death.
When to opt for a longer term length
There are a couple of reasons why you may want to choose a longer term:
- Your rate will never be as low as it is today. With term life insurance, your rates are locked in. This means that even if you develop a health condition during the term, it won’t affect your premium. But if you apply for a new policy once your coverage expires, you may be slapped with higher rates. The younger and healthier you are, the better your rate will be. Inflation comes into play, too — it’s hard to guess what premiums will look like 10, 15, 20 or 30 years in the future.
- You may soon have more financial responsibilities. If you’re planning to get married, buy a house, have children or start a business, you could prepare for that by purchasing a longer policy. Alternatively, you can ‘ladder’ policies that match your specific obligations. For example, if you have a baby on the way and 10 years left on your mortgage, you might take out a 25-year policy and a 10-year policy.
- You may be able to adjust your coverage later on. If you don’t need as much coverage as you anticipated, your insurer might allow you to lower your coverage amount — and therefore your premiums — without going through the underwriting process again. This will save you the time and money it takes to reapply for a policy at an older age.
How term lengths affect premiums
The longer your term, the higher your monthly premium. The reason is simple: As we age, our probability of dying increases. So, if you take out a longer policy, there’s a bigger risk of you dying during that term, which means your insurer will need to pay out the death benefit.
To compensate for that risk of dying, insurers hike up the rates.
Insurers also factor the effects of ageing into your rates. As a result, the monthly premiums for a 30-year policy will be higher than that of a 20-year policy because insurers knows a lot can change in those last 10 years, especially health-wise. The benefit of buying a longer term is that you can lock in your rates at a younger age, so they won’t increase — even if you develop a serious health condition.
How much coverage should I buy?
Once you decide on a term length, work out how much coverage to carry. When you’re crunching the numbers, factor in three things:
- Income. The rule of thumb is to buy a policy that would replace your income and cover your family’s cost of living for five to 10 years. To do this, multiply your salary by five or 10. If you’re earning $50,000 a year, you might consider a $250,000 or $500,000 policy.
- Assets. As you move through life, you’ll most likely gain assets such as a house, car, savings account or 401(k). Unless you have healthy bank accounts or investments, your life insurance policy should protect these assets. Total their value and add that dollar figure to your coverage.
- Financial obligations. Think about all of your expenses now and those you can expect in the future. These may include childcare, college tuition, burial costs or care for an aging parent. And if your partner is a stay-at-home parent or low-income worker, you may want more coverage. Also, if you want to leave a legacy for your children and grandchildren, you could consider adding ‘cushion coverage.
Compare life insurance companies
The best way to choose a term length is to think about your major financial obligations and take out a policy to match that timeframe. But life insurance is an investment, so only buy as much coverage as you can afford.
If you’re ready to purchase a policy, compare life insurance providers.
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