Term life insurance is a type of policy that offers coverage for a specified time, typically between five and 30 years. If the insured dies during the policy period, the policy pays a predetermined death benefit to the designated beneficiaries.
Once the policy term is up, you may be able to renew. If you choose not to renew, the contract expires. No further premiums are due at that point, and the insurance company does not pay a death benefit. Since term policies are in force for a limited time and do not have a cash value component, they are generally a straightforward and affordable way to purchase life insurance coverage.
If you’re considering purchasing a term life insurance policy, it’s important to consider how much coverage you need and the term length likely to meet your needs. In the following guide, we explore common uses for each term length and some factors that may help you decide which term length might be right for you.
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Types of Life Insurance Term Lengths
Life insurance policies are available in various term lengths designed to meet an individual’s specific circumstances and needs. Shorter term lengths are typically used to cover short-term financial obligations or when an individual expects their needs to change. Longer term policies can help provide financial security for your loved ones over an extended period. They are often used to cover expenses such as mortgage payments, the cost of college education for your children, and other expenses and provide long-term financial support for your loved ones.
5-year Term
A 5-year term policy offers low premiums and coverage without a long-term commitment. This type of short-term policy may be suitable if you have financial obligations expected to last no more than a few years. For example, you may purchase a 5-year policy to cover an outstanding vehicle loan, business loan, medical debt, or credit card debt.
If you’re a smoker who is in the process of quitting or are overweight and starting to live a healthy lifestyle, purchasing a 5-year policy can give you short-term coverage until you can apply for a longer-term policy with a preferred rate.
Keep in mind that 5 year terms are decreasing in popularity and only offered by select insurers.
10-year Term
Younger individuals may consider purchasing a 10-year term policy to cover intermediate-term financial obligations, such as student loan debt. A 10-year policy may also be beneficial for those who are just starting their careers. It’s an affordable option to help ensure your loved ones have the funds to pay for living expenses, childcare, and other costs if you die prematurely.
A 10-year term policy may also be attractive to an older individual who wants temporary coverage to replace their income in case they die in their final earning years. This can help protect their loved ones from having to postpone retirement or deal with financial insecurity due to an untimely death.
20-year Term
A 20-year term insurance policy is popular due to its relatively low cost and fairly long coverage period. This term length may be ideal for individuals with young children, as it can provide coverage for the entire time they are minors and may extend into their college years. Couples without children who are in good health may also benefit from being able to lock in 20 years of coverage at a fixed rate.
Younger individuals who have taken out large student loans with the help of a cosigner may also consider a 20-year term policy. If the borrower dies, the death benefit can cover the loan balance, so the cosigner is not responsible for paying it off.
30-year Term
A 30-year term policy can provide long-term coverage for financial and family obligations without the higher costs of purchasing a permanent life insurance policy. It may be a good option for new parents or individuals with long-term debt, such as a 30-year mortgage or a large student loan.
Since a 30-year policy can cover a large portion of your working years, it may also be an attractive option for those who want to protect their loved ones until they near retirement.
Factors to Consider When Choosing Term Length
When selecting the term length for your life insurance policy, several important factors must be considered, including your age, current financial obligations, and the ages of your children. Your career plans, current health, and risk tolerance may also impact your decision. Here are the details.
Your Age
Generally, individuals who are young and healthy pay lower insurance premiums. Your policy premiums increase as you age, so locking in a longer term policy when you’re young may save you money. Your age also helps determine how long you may need to provide for your loved ones. Many individuals choose a term length that corresponds with their expected retirement date.
Your Current Financial Obligations
Term life insurance is commonly used to ensure your loved ones have the financial means to pay off outstanding debts in the case of an untimely death. When determining the appropriate term length for your needs, consider the years until your mortgage and other significant debts are paid off.
The Ages of Your Children
If you have or are planning to have children, consider how long you want to provide for their financial needs. Depending on the ages of your dependents, you may consider a 15-year or 20-year term policy to help ensure things like food, clothing, childcare, camps, and college tuition are paid for until they reach a certain age.
Career Plans
Your career plans can impact your job stability, predicted income growth, and retirement timeline. Younger individuals who expect a significant increase in income over time may benefit from choosing a 30-year term policy to help ensure adequate life insurance coverage even as their lifestyles and financial responsibilities evolve. On the other hand, older individuals with a well-established career may choose a 10- or 20-year term that aligns with their anticipated retirement age.
Health Considerations
If you have a pre-existing medical condition or are concerned you may have health issues, you may consider purchasing a longer-term policy. A 20-year or 30-year policy can provide coverage even if your health deteriorates. Alternatively, if you are overweight or have unhealthy habits, you may consider purchasing a shorter-term policy to improve your health before locking in a long-term policy.
Risk Tolerance
If you have a low risk tolerance, you may consider a longer-term policy, which can give you a higher level of financial security for an extended period. Shorter term lengths give you the flexibility to frequently re-evaluate your needs. However, you risk developing health conditions that may make you uninsurable or significantly impact your premium costs.
Putting it All Together
Choosing the ideal term insurance length requires thoughtful evaluation of multiple factors. Shorter term lengths tend to be affordable and offer significant flexibility, while longer term lengths are more expensive but provide additional stability and may lower your risk. If you’re unsure which term length may be right for you, consider consulting with a financial professional who can help you evaluate your needs.