For younger people in relatively good health, term life insurance has long been the option of choice. Covering a specific number of years and maintaining no cash value, the premiums on term policies are usually less than those of whole life insurance.
With term life insurance coverage ranging from one to 40 years, choosing the right length can seem like guesswork. The best term length is not a one-size-fits-all proposition, says Matthew Russell, a Certified Financial Planner in Kingwood, Texas.
However, there are ways to narrow your choices. Here are some factors to consider when deciding on a term length.
Your financial commitments
Financial commitments include things like your mortgage, college expenses and other big-ticket items that you will pay in the future. Most people want to make sure that their term life insurance is in effect while those debts must be paid, says Monique Burkes, a business analyst and insurance agent in Columbia, S.C.
“If you know the house is going to be paid off in 10 years, you might not want to buy a 20-year policy,” Burkes says. “A longer term isn’t going to hurt you, but there might not have been a really good reason for it.”
What you can afford
The longer a term life insurance is, the greater the annual premiums, Burkes says. If you know you need a certain dollar amount of life insurance coverage but can’t afford a decades-long policy, one option is to buy for a short term and hope you’ll be able to afford and qualify for a longer term when the first policy term is completed.
“Say you know you want a $500,000 policy and you don’t want to deviate from that, but you can’t afford to pay the premiums associated with a 30-year policy,” Burkes says. “You could go with 10 or 20 and hope and pray that your financial situation will be improved by the time that policy is up, and that you’re in good enough health to be underwritten again.”
If the cost of the term life insurance premium is a factor, Russell recommends purchasing insurance from a broker rather than one specific insurer. “These people can go out and get quotes from 15 or 20 different insurance companies,” he says.
Whether term life is right for you
Not everyone requires term life insurance or any life insurance at all. People who have paid-off homes, adult children out of school and sizable savings may not need a life insurance policy, Russell says.
“If you’ve been financially diligent over the years in creating a nest egg between retirement accounts and personal savings, you’ve in a sense become self-insured,” he says.
Other situations may require a different kind of insurance. For example, married couples that work and have no children may want to use just the group life insurance benefits offered by their employers to take care of a funeral and other expenses.
“But that’s really something the couple needs to decide,” Russell says. “Does the surviving spouse really want to take on the burden of making a mortgage payment or would they want the house paid off?”