When you buy life insurance you want to make sure the policy continues for as long as you have people who depend on you financially, and until your last major financial obligation is paid. But how do you determine how long your policy should last?
To help determine how long your policy should last, you might want to first examine the types of life insurance available. There are two main types of policies.
Term life insurance is an easy-to-understand policy that has level premiums that last for a set number of years. Terms typically last 10, 15, 20, or 30 years. This type of life insurance includes a generally tax-free death benefit in the form of a lump sum that’s paid out to a beneficiary by the life insurance company if you die during the term period. This generally tax-free lump sum can be used for a variety of things, from burial expenses to mortgage and debt payments, to living expenses for your family, to donations. To continue coverage after the level term period, you’ll have to convert your policy to permanent coverage before the term ends, pay renewal premiums that increase annually, or shop for a new policy which will require new underwriting. Term is usually the least expensive form of life insurance.
Permanent life insurance is a policy that does not expire. It lasts the lifetime of whoever is insured, as long as premiums needed are paid. Permanent life insurance premiums are used to maintain the policy’s death benefit and allow the policy to build cash value that can be borrowed by the policy owner. Once a waiting period expires after you buy, you’ll have the option to withdraw money to help you when you need it most. If you have an emergency medical issue, for example, the cash value can be used to pay for health care costs.
Many policyholders also tap into cash value for other reasons, such as building a nest egg for retirement or supplementing retirement income. The cash value for permanent life insurance policies grows generally tax-deferred, which means you don’t pay taxes on any earnings as long as the policy remains active. When you die as the insured, your beneficiaries will receive the death benefit. Keep in mind that because a permanent life insurance policy provides coverage for your entire life, it is a more expensive option.
Regardless of how much life insurance you need and can afford, your eligibility for your term life insurance policy will come into play. Life insurance companies want to see evidence of insurability, or justification that you financially qualify for the amount of coverage you’re asking for. The term length you can get is usually reliant on your age — it accounts for how many years you have before you retire and will no longer make an income or have dependents. The older you are, the more limits you might have when choosing a term length, but some life insurance companies do offer older applicants their longest term length. Each life insurance company approaches this differently, so it’s important to talk to your life insurance agent about what you qualify for.
Your life insurance rate is likely at the lowest point it will ever be when you are young. Rates typically rise as you age and your health status tends to change.
There’s also inflation and other unexpected changes to the insurance industry that could raise rates in the future. It’s hard to tell what factors may alter a policy 20 years from now.
Another consideration is that if you don’t purchase a long enough term and need to buy additional life insurance coverage down the road, your premiums will likely rise significantly. It’s possible you won’t be able to afford added insurance. Spending money for a longer term now will prevent that inflation and you can always cancel your policy without penalty if you do discover that the term you chose is too long. Your only cost will be the premiums that you’ve already paid.
Purchasing a 30-year term will certainly cost more than a shorter 10 or 20 year policy, but it also means your loved ones are more likely to receive the benefits they need when you’re gone. You’ll also be able to lock in the premium when you buy. Not having to worry about rate increases as you age can give you peace of mind.
Do you have questions about how long your life insurance coverage should be? Discuss policies options with a financial professional.