Life insurance can be broken down into two broad categories: term and permanent. Once you have a firm understanding of how life insurance works and you’ve decided that you’ll need term life insurance, the next question to ask yourself is how long should your term life insurance last?
Before answering that question, let’s first address the issue of term life insurance versus permanent life insurance. Deciding on life insurance can be daunting, as you’re looking to make a financial decision that will have a financial impact for the foreseeable future. If you’ve been comparing quotes and doing your research, by now you’ve discovered that permanent life insurance policies are far more expensive than term life insurance policies. Consumer Reports shows that a 40-year-old-man in perfect health who wants a $500,000 policy would pay $6,670 in annual premiums for a “whole-life” policy versus $660 for a term policy. If you’re currently priced out of a permanent policy, the good news is: you can purchase a permanent policy later and carry both term and permanent life insurance.
In the meantime, if you’re planning on purchasing a term life insurance policy, here are some general guidelines.
How Long Should Your Term Life Insurance Last?
This is on a case-by-case basis, depending on your specific circumstance, but the rule of thumb is to determine your longest lasting financial obligation (retirement/children/mortgage/any other long-term financial obligations) and purchase enough coverage to meet those obligations. Term policies are typically sold in increments of 5 years, so you’ll want to round up to ensure you’re properly covered.
For example, assume that your child will be self-sufficient in 18 years and your house will be paid off in 22 years. In this scenario, we recommend buying a term policy of 25 years.
The bottom line: you’ll want to put some thought into this before deciding upon the specific term. If you go too short, you won’t have the coverage you need. Go too long and you’ve paid more than you should.
What if I picked the wrong length?
As your life changes over time, it may impact your life insurance needs. Once you’re out of debt, your kids have grown, and you’ve been sufficiently saving for retirement, you may no longer need life insurance. In this scenario, it might make sense to cancel your term life insurance policy. What you’re paying in annual premiums may be better served towards your retirement and invested to help build your nest-egg.
There’s also the possibility of converting your term policy into a permanent policy. Again, this is a case-by-case basis and you’ll want to analyze if keeping a life insurance policy makes financial sense. Just know that this is an option with many carriers and this may be something to consider when choosing a carrier.
If you haven’t purchased enough term life insurance, you may have the option to purchase more. Keep in mind, you’ll be older now, and as such, at a higher risk of death. You can expect that premiums will be more expensive at this stage in life.
There’s also “annual renewable” term life insurance, which guarantees coverages for a specific term, but allows the insured to renew annually. This is a good option to consider for short-term needs or those who expect to get a job where group coverage is offered. Keep in mind, if you opt for this type of term policy, you can expect premiums to rise in cost as you age.
Once you’ve decided upon a term life insurance policy and considered your financial obligations, we recommend rounding up to ensure you’re covered. Put some thought into the process before hand and you’ll be able to make an informed decision on how long your term life insurance should last. Although your life will change and there’s plenty of scenarios or developments that you can’t predict, take some comfort in knowing that with options such as purchasing both term and permanent, converting from term to permanent, annual renewable policies, or canceling your policy, you will have the flexibility to tailor your life insurance to best fit your needs as the years go by.