The operative word in term life insurance is the word “term”. That’s the word that separates term life insurance from permanent life insurance. Your policy will only be in force for a specific amount of time, which is known as the term.
So if your insurance policy is term and will not be permanent, what is a useful guideline as to how long the term of the policy should be? Term policies normally run for 5, 10, 15, 20, 25, or 30 years – which should you choose?
You can tie the term of the life insurance policy to certain life events after which the coverage will no longer be necessary. Some examples:
When your children are grown
Generally speaking, the purpose of any kind of life insurance is to be able to make a financial provision for your dependents in the event of your death. Since children are the most dependent of all dependents, a popular term is one that will cover the time between now and the age your children will reach adulthood.
You’ll have to start by determining what age will constitute adulthood. If your children are not going to college, that age might be 18. If they are, 22 or 23 will be a more appropriate age. You may even consider 25 to give them some time to get settled in life after they complete their education.
Let’s say that your youngest child is now seven years old, and you fully expect her to go on to college. You can probably figure graduation age at around 22, and by subtracting her current age of seven years, you’re left with 15 years. If you are looking for a term life insurance policy, a 15 year term would make sense in this case.
When your mortgage and other large debts are paid in full
You could also tie the term of your life insurance to the payoff of debt, including specific debts.
If you have 25 years remaining on a 30 year mortgage, you can set the term of your life insurance to 25 years. That will ensure, at a minimum, that at least your mortgage will be paid in the event of your death. That will enable your family to continue living in their home without worrying about a mortgage payment.
Once the mortgage is paid, the insurance policy will no longer be necessary.
When you retire
Usually, by the time you retire, you have predictable, unearned income sources, and you’re very likely to be debt-free. For this reason, you can use your expected age of retirement as a basis for your term life insurance.
If you’re 45 years old and expect to retire at 65, a 20 year term life insurance policy would work well for you.
If you are quite a bit younger, say 25, and you want to insure your life through retirement, you may have to consider using consecutive term policies to cover the full 40 years that are involved. You can for example, take a 30 year term policy now, and then a second policy for an additional 10 years once the original policy expires.
When you become effectively self-insured
As we get older, our financial situations tend to improve. Assets grow and debts are gradually paid off. There will be a point in the future where you will have sufficient assets and probably will not need life insurance.
This is particularly true if you are a regular saver. If you’re 35 years old and you have $50,000 saved – apart from your retirement savings – and you can reasonably expect to have $200,000 saved by the time you’re 50, this can be a convenient termination point for your life insurance. At 35 you can take a 15 year term policy to cover the time between now and when he you will expect to have sufficient assets that life insurance will no longer be necessary.
There’s much to consider when you’re deciding upon the term of your life insurance that can save you a lot of money. It is a topic best discussed in some detail with an experienced life insurance professional.
Neal here. If you have specific questions on life insurance or face hurdles getting coverage - email me please. As an alternative, we could jump on the phone (818-889-6700) for a few minutes. Either way, I'm happy to do my best to point you in the right direction.