You’ve researched your life insurance options and know you need term…
… but what is the best term length for your needs?
I see a lot of confusion here with my clients.
Some want to select a term for the exact amount of years they have left on their mortgage, or line it up with their retirement date.
But there are a few other considerations.
And since I get this question so often, I’ve laid out a complete guide to selecting the right term life insurance length for you below.
… or feel free to skip the article and start comparing quotes.
What Exactly is a “Term”?
A term is the amount of time the policy is guaranteed to stay the same cost.
During this time the insurance company cannot decrease the amount of coverage you have (face amount) or increase the price of your premiums. (The premium is the cost of your insurance and can be paid monthly, quarterly, semi-annually, or annually).
Term insurance is designed to provide your family with the amount of money they would need to survive if something happened to you.
What is the Best Term Length to Cover a Mortgage?
For some of my client’s this may mean leaving enough money to pay off a mortgage. In this example you want the term to last until the mortgage is gone. So, if you are purchasing a 30 year mortgage, you’ll need the term insurance for the next 30 years. This is to make sure the policy lasts until the mortgage is paid in full.
Insider’s Tip: Imagine you’re paying for a 30 year term that lines up with your mortgage being paid off. Your loan is for $490,000 so you take out a policy for $500,000. Here’s the thing. 20 years from now, do you really still need $500,000? So in a sense you’re paying too much since you bought a 30 year policy. What you might try instead is buying 2 policies with separate term lengths. This can save you a lot of money. We’ve covered this strategy in depth in our affordable life insurance guide.
Term Life Insurance Until Children Are Independent
Another common term is until your children are grown-up and out of the house.
In this situation, you want to insure yourself for your children until they are at least 18, or 22 if you’re planning for your children to attend college. This is a simple calculation as well. Let’s say you have 3 children ages 2, 4, and 5 and you want your children to all go to college. Take your youngest child’s age, subtract this number from the age you think they will finish college and that is your term. (22-2=20) In this example a 20 year term will insure there is coverage on your life until your youngest is 22, or the age most children finish college.
Term Life for Income Replacement Purposes
Retirement is the third most common variable people base their term insurance around.
Simply put, you want coverage to replace your income to your spouse or family should you pass on unexpectedly.
This is also very simple to figure out, how many years do you plan to continue working? This is how long your term should be.
You could also use the policy layering technique we described in the last section. The idea here is that as you approach retirement, you may need less coverage. However, you’ll want to keep inflation in mind here. $500,000 today might seem like enough to cover your needs for 20 years, but will that be enough 10 years from now?
Most of my client’s in this category have a pension, 401k, or retirement set up and all they want to make sure that is something happens to them before they have accumulated enough money to retire, their family will be protected. Also be careful of some of the common retirement myths as you plan for life insurance. You may need a lot more than just 1 or 2 million to retire in the future.
If you need to have protection for a children and mortgage, select a term that will protect whichever event is further out. So if there are 12 years left on the mortgage and your youngest is 7 (22-7=15), select at least a 15 year term.
What if I want the coverage forever?
That is an option, but a very expensive one. As people get older and major life events pass most people will need less and less coverage, which is why term insurance was designed. It will provide your family while they are the most vulnerable with the protection they need for the lowest cost.
The other part of this equation is selecting the face amount…
… and for that, we’d recommend visiting our life insurance calculator page.
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