Term life insurance comes in a wide range of terms (years). Deciding how long your term life policy should take some careful planning and consideration. Here is what you need to know.
When you decide to buy term life insurance, you have two fundamental decisions to make: how much coverage to buy and for how long your coverage should last.
We will cover in detail what you need to know when selecting the length of coverage for your term life insurance policy.
What does term length for life insurance mean?
Term life insurance is sold for different lengths of time during which the coverage is effective. Terms are typically between five and 30 years, although there are shorter and longer terms.
When you buy a five-year term life insurance policy, you will have life insurance coverage for five years. That is what “term” means in term life insurance; the length of time you will be covered.
How to choose the right life insurance term length for you?
The length of the term that is right for you depends on many variables. Life insurance can fill many different needs and purposes, so everyone will be different. However, there are some general guidelines that you can use to make an informed decision; let’s review those now.
Annual Renewable Term Life Insurance (ART)
This is the shortest term available of all term life insurance policies. This is ideal for people who are usually covered by their employer for insurance and are between jobs. Also, if you have dependents who rely on your income, this is a great way to protect them for a short time while you get another job that provides insurance.
This is also used by business people who may have recently incurred a large short-term business loan. They may want to ensure that obligation is not born by anyone else if they die. These policies last for one year and offer the option to renew. In addition, you can choose a death benefit to suit your needs for a short duration so you can financially protect your dependents and control your premium payments.
Five-year term life insurance
This is also a great term life insurance option for different life stages and circumstances. If you should die, you can get enough coverage to take care of short-term financial commitments.
This is also a great option for coverage if you have recently quit smoking and want to buy life insurance as a non-smoker. Once you are free of tobacco for three years, you can be rated as a non-smoker. If you have any other health problems that can be resolved during this time, you should also consider getting a five-year term life policy. Then, once your health improves, you can get better coverage and a permanent life insurance policy.
10-year term life insurance
A policy of this length is well suited for people with children who may still need financial assistance in your absence. In addition, this is a good product if you have young adults in college and you want them to rest assured, they can finish school if you die prematurely.
This is also ideal for business partners who may have started a business, incurring substantial business debt. A 10-year term policy will protect against being without the contribution of a partner if they should die. Ten years is enough to get a business off the ground and pay off debts.
20-year term life insurance
This is the most commonly sold term life insurance plan. This type of policy gives you protection for a set period of time, usually 20 years. If you pass away during this time, your beneficiaries will receive a death benefit. This coverage is especially important if you have young children. If something happened to you, your spouse would need help paying for childcare, education, and other expenses. Life insurance can give you peace of mind knowing that your loved ones will be taken care of financially if something happens to you.
Another reason to purchase 20-year term life insurance now is that it is more affordable when you are younger. Your premiums will increase as you get older, so it makes sense to lock in a rate while you are still young and healthy. These are great life insurance policies to replace the income of new parents or recently married couples while their family grows.
30-year term life insurance
A term life insurance policy of this length can offer affordable coverage for long-term obligations like a mortgage and other long-term debts. In addition, this is a great option for younger people who want coverage for most of their earning years.
While term policies do not earn cash value and may be seen by many as strictly an expense for a long time, you can remedy that. First, you can add a return of premium rider to these policies so that, in the end, you can at least get back what you paid into the policy.
What are the most common term life insurance coverage lengths?
The most common lengths of term life insurance are 20 and 30-year term policies. They offer extended coverage to satisfy most needs, and the premiums are more affordable than permanent life insurance.
Who might need a 30-year term length?
30-year term life insurance is suitable for those looking for income replacement during their earning years. This is a good choice to provide a safety net for your dependents for a longer period.
Who might need a 20-year term length?
A 20-year term life insurance policy is ideal for individuals who are not yet financially independent and want coverage to care for their family as it grows. In addition, 20-year policies offer affordable coverage to protect young children or dependent parents.
Who might need a 10-year term length?
A 10-year term life insurance policy is enough to insure the latter part of a mortgage term. This term can also offer financial protection for young adults going to college and still dependent on their income to finish school.
Reasons to consider a longer length of time
Your financial situation and future plans will dictate how long you need life insurance coverage.
Younger parents benefit the most from longer-term life insurance length. Any situation that requires your income to keep going should play a part in your decision regarding the length of insurance.
Frequently Asked Questions
How long is term life insurance good for?
Term life insurance is good for the term of the policy. For example, if you buy a 10-year policy, you will have life insurance for 10 years. However, the logical answer to this question depends on a few factors, but ultimately it comes down to what you need and what your budget is.
Term life insurance is one of the most affordable options when it comes to life insurance. It’s also one of the most popular options because it offers protection for a set period of time. The most common term lengths are 10, 20, and 30 years. But how do you know which one is right for you?
First, you need to think about how long you need coverage. If you’re young and healthy, you might only need coverage for 10 or 20 years. But if you’re older or have health issues, you might need coverage for 30 years or more.
Next, you need to think about your budget. Term life insurance is more affordable than other types of life insurance, but it still has costs associated with it. If you’re on a tight budget, you might want to consider a shorter-term length so that you don’t have to pay as much in premiums.
Finally, you need to think about your family and their needs. If you have young children, you’ll want to make sure that they’re taken care of financially if something happens to you. A longer-term policy will give them the coverage they need until they’re old enough to fend for themselves.
How do I know how much term insurance I need?
Calculating life insurance needs involves looking at several aspects of your life using the DIME principle. First, you want sufficient coverage to meet outstanding financial obligations if you die prematurely.
Here is a short list of common obligations you need to consider when purchasing life insurance:
- your annual salary
- mortgage balance
- medical bills
- final expenses
- outstanding debts your dependents would continue paying in your absence
- education expenses.
Add up all these expenses to calculate how much life insurance you should buy.
What happens after 30-year term life insurance?
The insurance policy expires at the end of the 30-year term, and you no longer have insurance coverage. This may seem unappealing if you are considering a 30-year term life insurance policy. After all, why would you want to pay for 30 years to have nothing at the end? Let’s examine a little closer what actually happens:
The first thing to consider is that for 30 years, you have had insurance to offer a safety net to those that depend on your financial support. That is essentially what life insurance does, offer protection. It also happens that term life insurance rates allow you to get this protection at a low rate.
Take into account that if your term life insurance was purchased 30 years ago, you were likely very young and healthy. For a few dollars per every ten thousand dollars of protection, the life insurance company provided a large enough coverage amount so that your mortgage and other debts would not be a burden to your dependents if you died early. The term life policy coverage amounts also ensured that your family’s financial goals would not be completely derailed in your absence.
During the latter years of the 30-year term, the coverage amount provided insurance so that your aging parents perhaps could also cope with the loss of your assistance.
What is the ideal age to take term insurance?
The best age to take term insurance is when the policy helps you achieve your personal finance objectives.
Here are some things to consider about age and life needs:
When you are young, you are also the healthiest in general. Therefore, you will pay the lowest rates on a term life policy at that age. In fact, you will pay the lowest rates on permanent life insurance as well.
Life stages are also appropriate to consider if you can benefit from term life insurance coverage. If you are in your mid-age years and have elderly parents who depend on your support, adding a supplemental term life policy may offer additional protection for them, without taking away from others who might depend on you. You can offer this protection at an affordable cost compared to whole life or universal life insurance.
Another instance in which you could benefit from term life insurance at any age is if a medical exam revealed you have health conditions that prevent you from qualifying for permanent life insurance. Guaranteed and simplified issue term life policies can be purchased without a medical exam.
Final thoughts
Trying to determine the optimal life insurance term length takes some planning. However, term life insurance is a flexible product with so many options you can tailor a policy to fulfill the exact goal you want.
Term life insurance is not meant to offer coverage for your entire life. Still, it does offer affordable coverage for most needs. What you want to consider here is that you will get much more coverage on a term than on a permanent life insurance policy.
Unlike term life insurance, a permanent policy will accumulate cash value, so you have to plan and decide carefully. You don’t have to choose one or the other either. Suppose your objective is to build cash value. In that case, you can split coverage among two policies to get the maximum coverage with a term policy and a permanent policy that builds cash value.
