After choosing the benefit the policy will pay out, the most important decision when buying term life insurance is how many years of coverage to get. The length you choose affects not only how long you'll be protected but the premium you'll pay.
Term policies are the most popular life insurance option, in large part because their cost is far lower than for permanent insurance policies of the whole life and universal life types. Term lengths typically range from 10 years to 30 years, and choosing the term that’s best for you requires balancing the cost of coverage with the risk of having the policy run out when you still need protection.
The longer a policy will run, the more you it will cost you per month or year. That’s because life insurers price policies according to the likelihood they’ll have to pay the death benefit over the years the coverage is in effect, explains David Pierce, a professor of Insurance at The American College of Financial Services. “The older policyholders get, the fewer years they are likely to live, statistically speaking -- therefore the increase in premium."
The cost differences by term can be substantial, according to Ozzie Gonzalez, director of employee benefits for the JAG Insurance Group. For example, he estimates that a healthy 35-year-old male seeking $500,000 in coverage might pay around $3,000 more in premiums in the first ten years of a 30-year policy compared with opting for a policy that runs for only 10 years.
The downside of a shorter policy, of course, is that it ends earlier -- and if you still require coverage when time is up, it will be more expensive than it was for your original policy, due to your age. Worse, if you develop medical issues during that time you could be shut out of coverage entirely, depending on how serious the health condition is, says Pierce.
Here’s more on the factors that should drive your decision on term length, along with how the specific term lengths may meet your needs.
Key factors when choosing a policy term
Apart from how hefty a premium you can afford, several factors are important to the length of term policy you opt to buy.
If your family relies heavily on your income to make ends meet, Gonzalez says, consider a policy that lasts until you plan to retire — or at least until you think you’ll have enough in savings and investments for your family to be secure without that income.
The age of your children
Your kids or grandkids should also play into your decision. "Education of children and grandchildren is often provided from life insurance policy proceeds, either directly or in a trust," says Pierce. If you have young children or plan to have them soon, term life insurance of 15 or 20 years, or longer, can offer security to your family. If something happens to you, your policy could help provide for your children until they're through college or out on their own.
Pierce adds, too, that life insurance can also be used to provide guaranteed funds for children or other family members who have special needs, and so may require financial support even as adults.
Your mortgage and other debts
A life insurance policy should last at least as many years as you plan to spend paying off your mortgage or a substantial credit card debt. This can protect your loved ones from being responsible for your debts if something happens to you.
Pros and cons of various term lengths
With that in mind, here are thoughts from Gonzalez on the merits of various term lengths, and the people who might benefit the most from each.
The obvious advantage of the longest policies is to lock in the lowest premium available for a full three decades. (Or possibly more; Gonzalez says 35- and 40-year plans have started to appear on the marketplace lately, but they can be difficult to get.)
The disadvantage of a long term is that your needs and circumstances may change over all that time. As a result, Gonzalez says, “you will probably not keep the policy for the full term." And if that happens, he points out, each year's coverage under the policy will have been pricier than if you'd obtained a shorter term with a lower premium.
A policy that runs for two decades offers a sweet spot for length, Gonzalez says. Apart from still offering fairly modest premiums, he says, such policies usually come with “great conversion periods" -- that is, long windows within which you can convert the term policy to permanent coverage, which is one of the options to consider when a term policy expires and you still need ongoing coverage.
If you're stuck in choosing between a 20-year or a 10-year policy, there are also 15-year policies from some companies. Such a policy can be "significantly less expensive" than buying one with a 20-year term, Gonzalez says.
More than low cost makes a 10-year policy potentially appealing. In particular, because it won't run for very long, it will facilitate, even encourage, changes to your life that may affect the rate you pay. A case in point is making changing your lifestyle in a positive way.
“[10-year] plans are a great fit for smokers trying to quit, as it gives them time to quit and retest," Gonzalez says. That is, you reapply for a new policy without the higher risk factors associated with smoking raising the cost of coverage. Such a move could allow you to pay a lower premium than would have by buying a policy with a longer term as a smoker.
But 10-year policies do, of course, run out the most quickly. They also tend to have “extremely short conversion periods" to permanent policies -- which means you have less of the term in which to convert the term coverage to permanent.
How to choose a term length
Like much else about life insurance, there is no one-size-fits-all choice for term length. "Consider how long a term life policy will be required based on your specific financial goals and needs. Goals always come first," says Pierce. Only you and your insurance agent know what length will work for you, he adds.
That said, most experts recommend erring on the side of getting a term that's longer rather than shorter. Reasons include future uncertainty about your health; you may be left without coverage if a medical issue prevents you from getting a new policy when the term for the initial one expires.
Still can’t decide? There is always the option to “ladder” coverage by buying multiple policies, Gonzalez says. This move is the insurance equivalent of investors who ladder Certificates of Deposit through buying a number of those with differing maturity dates -- and thus interest rates, too. As with such investment laddering, the goal of laddered insurance is to reduce risk by covering multiple scenarios with a number of purchases.
You could, for example, choose to split up the death benefit you need into three parts -- and spread that total among one 30-year policy, one with a 20-year term and one with a 10-year term. Alternatively, you might buy just one policy initially, and add other policies as your obligations -- and income -- increase with age. Needless to say, an insurance professional -- and possibly a financial planner, too -- is essential to help you formulate and execute an insurance laddering strategy.
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