How to Select the Perfect Term Length for Your Insurance Needs
So - you've done your research and looked at all the different life insurance options. You've come to the conclusion that a term life policy would be the best fit.
But how do you figure out what the best term length is for your needs?
We 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 wait, not so fast! There are a few other considerations you should consider before making your decision.
And since we get this question so often, we have 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 by entering your info below.
Here’s what we'll cover in this post:
Quick Article Guide
Here’s what we'll cover in this post:
What Exactly is a "Term"?
In the life insurance world, a term is the period of time that your life insurance policy is active. During this time, your policy is guaranteed not to change, but you can cancel at any time without penalty.
In addition, the insurance company cannot decrease the amount of coverage you have (known as the face amount) or increase the price of your premiums. A premium is the cost of your insurance and can be paid monthly, quarterly, semi-annually, or annually.
Term life insurance is a non-permanent policy that is designed to provide your family with the amount of money they would need to survive if something were to happen to you.
What is the Best Term Length to Cover a Mortgage?
For some of our clients, this may mean leaving enough money to pay off a mortgage. If this is your situation, you want to makes sure the term lasts until the mortgage is gone.
So, if you are purchasing a 30-year mortgage, you’ll need the term life insurance to be in force for the next 30 years. This is to make sure the policy lasts until the mortgage is paid in full, and you won't leave any debt to your family if you were to pass away before it was paid off.
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.
But here's the thing - 20 years from now, do you really still need $500,000? So in a sense, you'd be paying too much for the 30-year policy you purchased. Instead, it'd be a better idea to buy two policies with separate term lengths. This can save you a lot of money, and is known as layering policies.
We've covered this strategy in depth in our affordable life insurance guide.
Term Life Insurance Until Children Are Independent
Another common use for a term life policy is to have one in force 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.
Example: Let’s say you have three 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.
So to break it down: 22 (age he or she finishes college) - 2 (current age) = 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 life insurance around.
Simply put, you want your coverage to replace your income to your spouse or family, should you pass away 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. So if you plan to work 15 more years, a 15-year term life policy would be the best fit.
You could also use the policy layering technique that 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 our clients in this category already 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. You also want to 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), you'd want to select at least a 15-year term.
What if I Want the Coverage Forever?
Maybe you decided that you don't want temporary coverage, and would like a more permanent option. Permanent life insurance is definitely an option, but it does tend to be more expensive than term life policies. As people get older and major life events pass, most people will need less and less coverage, which is why term life insurance was designed. It will provide for your family when they are the most vulnerable, with the protection they need for the lowest cost.
So now that you have a better idea of how long your term life policy should be, we must figure out the other part of this equation: selecting the face amount.
Lucky for you, we created a handy life insurance calculator just for that purpose!
Questions? We Can Help!
Even with this information, we understand how overwhelming it can be to make a decision about such an important type of coverage. That's why we're here to help!
At JRC Insurance Group, we have helped thousands of families and businesses with their life insurance needs, and we can help you too! Our agency is licensed in all 50 states and we’re independently owned and operated.
As a non-partial, no-fee brokerage, our goal is match our clients with the best life insurance options available by shopping and comparing rates from more than 50 highly-rated insurers. By having access to dozens of companies and their guidelines, we’re able to save our client’s time and money.
Most importantly, our services as completely free, and there is no cost to apply for coverage. Give us a call toll-free today at 855-247-9555, or you can request a free quote online to compare rates and options from dozens of insurance companies in less than a minute.
Managing Partner and Co-founder
Cliff is a licensed life insurance agent and one of the owners of JRC Insurance Group. He has helped thousands of families of businesses with their life insurance needs since 2012 and specializes with applicants who are less than perfect health. In his spare time he enjoys spending time with family, traveling, and the great outdoors.