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When it comes to providing essential financial protection, term life insurance is the most affordable option for families.
The right term insurance policy offers an invaluable safety net, but choosing the right term length is crucial. Too short, and you risk leaving them unprotected. Too long, and you could be overpaying for coverage you don’t need.
Whether you’re looking to cover your mortgage, replace lost income, or ensure your loved ones are financially secure, selecting the appropriate term length ensures your policy is perfectly suited to your needs.
This guide will walk you through everything you need to know to choose the perfect life insurance term length for your unique needs. Read on to protect your family’s future today.
- Key takeaways:
- The life insurance term length determines how long you’ll have coverage, with both the death benefit and premiums guaranteed level during the term.
- In general, longer term lengths are suitable for younger individuals who have more long-term financial commitments, like raising children or paying off a mortgage, while shorter terms can be ideal for older adults who need coverage to bridget the gap until retirement.
- Although the most common term lengths are 10, 15, 20, 25, and 30 years, customizable terms are available, with some insurers allowing you to select term lengths between 5 and 50 years to fit your unique needs.
Understanding Term Life Insurance And How It Works
What is term life insurance?
Term life insurance provides a tax-free lump sum benefit to your beneficiaries if you pass away during the term of the policy. This payout helps your family maintain their lifestyle, pay off debts, and meet financial needs in your absence. You can select both the term length and the coverage amount, with premiums guaranteed throughout the term.
Common term lengths include 10, 15, 20, 25, and 30 years, although some insurers offer terms ranging from 5 to 50 years. Longer terms are more expensive than shorter ones because they cover you for an extended period when you are older and at higher risk of death.
When applying for life insurance, you’ll undergo underwriting—a process where the insurance company evaluates your health and lifestyle to determine your eligibility and risk level. Individuals in average health typically qualify for standard rates. Those in excellent health may qualify for preferred rates, resulting in lower premiums. Conversely, applicants with health issues or high-risk lifestyles may receive a “rated” policy, meaning they’ll pay higher premiums than the standard rate to reflect the increased risk.
Renewable and convertible options
Once the term ends, you can renew the policy, but the premiums increase significantly—sometimes up to ten times the initial cost. Renewal ensures continued coverage but can strain your budget if not planned for.
That’s why it’s more affordable to choose a longer term initially than to renew a shorter one. For instance, renewing a term-10 policy may cost more than starting with a term-20 policy due to the increased risk associated with age.
Example:
- A 35-year-old non-smoking male buying a $500,000 term-10 policy may pay $23/month.
- Renewing at age 45 increases premiums to $127/month.
- By contrast, a term-20 policy for the same coverage may cost only $32/month for 20 years, saving over $10,000 compared to the term-10 option.
Another option you have with your term policy is converting it to permanent life insurance if you anticipate a lifelong need for coverage, such as covering funeral expenses or leaving a legacy. Both renewals and conversions are available without requiring proof of good health, making them valuable options if your health has deteriorated during the term.
Term switch
Some insurers offer flexibility through a feature called term switching or term exchange, allowing you to adjust your coverage duration as your needs evolve. For instance, you could begin with a more affordable term-10 policy and later switch to a term-20 if you determine you require longer protection.
However, there are important considerations: most companies stipulate that this switch must occur within a specific timeframe, often the first five years of the original policy. Specific rules and restrictions can vary significantly between providers, so it’s essential to check with your insurer.
Switching to a longer term will result in a higher premium. This new premium will be calculated based on your age at the time of the switch, not your age when you initially purchased the policy.
Similar to renewals and conversions, a term switch does not require providing evidence of insurability.
Factors To Consider When Choosing A Term Length
Choosing the optimal term life insurance length is crucial for ensuring adequate protection for your loved ones. Here are the factors that will influence your decision:
Length of outstanding debts
Your term life insurance should be long enough to cover significant debts. For most people, the mortgage is the largest liability, so your term should match the amortization period of your home loan. Additionally, repayment timelines for other consumer debt like lines of credit, car loans, and student loans should be considered when choosing your term length.
If you’re a small business owner, consider matching your term length to the duration of any outstanding business loans. This protects your business and personal assets from being liquidated to cover these debts in the event of your passing.
Income replacement needs
Life insurance proceeds are often used to replace your income so your family can maintain their standard of living. When deciding on a term length, think about the age of your children and how many years they’ll need financial support.
For example, if your youngest child is five years old, a 20-year term would cover them until they’re 25 and likely financially independent. On the other hand, parents of teenagers may find a 10 or 15-year term policy sufficient in providing income replacement.
Life stage and age
Many people choose a term length that coincides with their retirement age, typically 65 in Canada. For example, a 35-year-old may select a term-30 policy to ensure coverage from age 35 to 65. This strategy provides cost certainty with a guaranteed level premium during the most critical working years.
While aligning with retirement is a common strategy, it’s not a strict rule. You can choose a term length that ends before or after 65, depending on your individual circumstances and financial goals.
Costs and budget
The longer the term, the higher the premiums, so it’s essential to balance your coverage needs with affordability. For instance, while a term-30 policy may best fit your goals, it could be outside your budget. In that case, a 20-year term insurance policy may be a more cost-effective alternative.
If a longer term is necessary, there are strategies to afford a term-30 policy without overextending your budget—more on that in the next section.
Common Term Length Options And Their Suitability: Finding The Right Fit
Choosing the right term length is a balancing act between cost and coverage duration. Here’s a breakdown of common term lengths and when they might be most suitable:
10-year term life insurance
Term-10 is the most affordable term life insurance option, making it attractive for short-term needs. It may be suitable if:
- Your children will likely be financially independent within the next 10 years.
- You anticipate retiring in approximately 10 years.
- You have roughly 10 years remaining on your mortgage amortization.
However, a 10-year term is generally not ideal for people in their 20s or 30s. While the initial premiums are low, renewing the policy after 10 years will be significantly more expensive due to increased age. This is problematic because individuals in this age group often still have significant mortgage debt and young families who rely on their income.
20-year term life insurance
Term-20 is a very popular choice as it strikes a good balance between coverage duration and cost. It can be a good fit even if it doesn’t perfectly align with your entire mortgage amortization. The rationale is that after 20 years:
- Your mortgage balance should be substantially lower, potentially allowing you to self-insure (rely on savings) for the remaining amount.
- Your children will likely be in their 20s, reducing the need for extensive income replacement.
Many people in their 30s and 40s find that a 20-year term effectively meets their long-term protection needs.
30-year term life insurance
With 30-year mortgage amortizations becoming more common, a term-30 policy is a good option for covering this major debt. It’s also well-suited for individuals in their late 20s or 30s who want to ensure income replacement coverage until their anticipated retirement age.
However, a 30-year term can become quite expensive for individuals in their 40s or later, making a term-20 policy a more budget friendly choice.
Most term life insurance policies offer the option to renew coverage up to age 85, at which point the policy expires.
For a 35-year-old non-smoking male seeking $500,000 in term life insurance coverage, the table below illustrates the trade-off between monthly premium and term length. Although the 10-year term is the most affordable upfront, the 30-year term can be more cost-effective over the life of the policy.
Term-10 | Term-20 | Term-30 | |
|---|---|---|---|
Years 1-10 | $23 | $32 | $54 |
Years 11-20 | $127 | $32 | $54 |
Years 21-30 | $290 | $527 | $54 |
Total premiums paid over 30 years | $52,800 | $70,920 | $19,440 |
Term-65
A term-65 policy provides coverage until you reach age 65. The actual term length varies depending on your current age. For instance, it’s like a 40-year term for a 25-year-old and a 30-year term for a 35-year-old.
A key difference is that term-65 policies are not renewable. The coverage simply ends when you turn 65. This type of policy is often suitable for younger individuals who primarily seek income replacement during their working years.
Other term lengths
Some insurers offer highly customizable term lengths, ranging from 5 to 50 years. This allows you to fine-tune your life insurance coverage duration to match specific needs, such as a 22-year term to align with a particular debt repayment timeline. Remember, the general rule still applies: longer terms equate to higher premiums.
Combination of multiple term lengths (Laddering)
There’s no rule that says you’re limited to a single term length. A strategy called “laddering” involves combining different term lengths. For example, you could purchase a $500,000 term-30 policy and a $500,000 term-20 policy. This provides $1,000,000 of coverage for the first 20 years. After 20 years, you can cancel the term-20 policy and retain the $500,000 term-30 coverage.
Laddering offers several benefits:
- Cost savings: It can be more affordable than purchasing a single, large long-term policy.
- Adapting to changing needs: As you age, pay off debt, and your children become independent, your insurance needs typically decrease. Laddering allows you to adjust your coverage accordingly.
- Addressing short-term and long-term needs: You can use shorter terms for immediate needs (like covering a mortgage) and longer terms for long-term income replacement.
Laddering is the strategy mentioned earlier that can help you obtain longer coverage without exceeding your budget. For example, a 35-year-old male non-smoker may pay $86/month for $500,000 of term-20 and term-30 coverage compared to $103/month for a $1,000,000 30-year term policy.
Frequently Asked Questions
What is a life insurance term length?
A life insurance term length is the duration your policy provides coverage, with both the death benefit and premiums guaranteed level during this period. Once the term ends, you can renew the policy, but the premiums increase significantly.
How long should your life insurance term be?
Younger people generally need longer terms to cover long-term needs like raising children or paying off a mortgage. Older adults may opt for shorter terms, but the best choice depends on your personal and financial situation, such as debts, dependents, and income replacement needs.
What happens when the term ends?
When your term life insurance policy expires, you typically have the option to renew it, often up to age 85. However, renewal premiums are substantially higher due to your increased age. These premiums may increase annually or remain fixed for a new term matching your original policy’s duration. Due to the significant cost increase, many policyholders choose to let their coverage lapse at the end of the term.
If you anticipate needing coverage beyond the initial term, purchasing a new policy can be a more cost-effective alternative to renewing. The premiums for a new policy, based on your current age and health, will generally be lower than renewal rates.
However, this strategy hinges on your ability to qualify for new coverage. Your health and lifestyle at the time of application will be evaluated, and there’s no guarantee you’ll be approved. Relying solely on this option carries some risk, as future health is unpredictable.
Is a longer term better?
Not necessarily. A term lasting into your late 60s, 70s, or 80s may be more than you need and will cost significantly more than a term ending in your early to mid-60s. Choose a term that aligns with how long you actually need coverage.
What is the best length for term insurance?
The best term length depends on your personal and financial circumstances. A knowledgeable and experienced insurance advisor can guide you through the process to determine how long your term life insurance should be.
Can you change your term length later?
Some insurance companies offer a term switch or term exchange option that allows you to change your policy to a longer term after purchase.
Can you cancel your policy before the term ends?
Unlike mortgages, which may have prepayment penalties, you can cancel a term life insurance policy at any time without incurring fees. This flexibility is beneficial if your circumstances change and you no longer require coverage.
What Life Insurance Term Length Do You Need?
Choosing the right life insurance term length is a critical step in protecting your family and securing your financial future. Whether you need coverage for 10 years, 20 years, 30 years, another term length, or a combination of terms, we are here to help. At Brian So Insurance, we provide personalized advice to ensure you find the best coverage tailored to your unique needs.
We offer in-depth comparisons with other insurance companies to help you secure the most suitable policy at the best value. Plus, we provide ongoing support to ensure your coverage continues to align with your evolving financial and personal circumstances.
If you’re looking for a complete insurance solution, we can also design a plan that includes term and permanent life insurance, disability insurance, health & dental coverage, and critical illness insurance.
For a free, no-obligation consultation, email us at info@briansoinsurance.com or call 604-928-1628. You can also use the form below to request a term insurance quote delivered straight to your inbox. Let us help you protect what matters most!
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