Plan for Tomorrow | How to determine your life insurance policy length
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How to determine your life insurance policy length

Sep 7, 2023, 12:53:18 AM | Reading Time: 6 minutes

When you buy life insurance, you want to select a policy that continues for as long as you have people who depend on you financially and provides the necessary coverage to meet your family’s financial needs. But how do you determine how long your policy should last? Here’s what to remember as you explore your life insurance options and which type of policy and coverage length makes the most sense.

How to determine your life insurance policy length

Life insurance length options

To help determine how long your policy should last, you might want to examine the types of life insurance available. There are two main types of policies.

Term life insurance

Term life insurance is a policy that has level premiums and lasts for a set period — usually 10, 15, 20, or 30 years. If the insured dies during the term, the insurance company will pay the beneficiary a death benefit. This generally tax-free lump sum can be used for various financial needs, including helping your family cover final expenses, paying off medical debt, keeping up with the mortgage or rent, or creating an emergency fund for the future. To continue coverage after the level term period, you may have the option 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 policies are usually the most budget-friendly option when buying life insurance and can help meet various families’ needs.

Is a longer-term length right for you?

When buying life insurance, it’s important to remember you will never be younger or healthier than you are right now. Selecting the correct length of coverage at the time of purchase can help you avoid needing additional coverage in the future, which can come with higher premiums due to your older age or potential health changes. There are also factors like inflation that could affect rates in the future.

While a shorter 10- or 20-year term policy may cost less than a 30-year policy, your family may not have enough financial support to cover their needed expenses after you’re gone. Taking a full exploration of your financial needs, like the ones listed above, can help you determine which length of coverage may be the most suitable. Many policies also allow you to lock in your premium, so you won’t have to worry about a rate increase as you age.

Permanent life insurance

Permanent life insurance provides coverage that does not expire and it lasts for the insured's entire life as long as premiums are paid. Permanent life insurance premiums maintain the policy’s death benefit and to help build cash value that the policy owner can borrow. Following a waiting period after you purchase the policy, you may have the option to withdraw money to help with your financial needs. For example, if you have an unexpected health event or a house repair, the cash value can help you pay for these expenses.

You may also tap into cash value for other reasons, such as helping to supplement retirement income. The cash value in a permanent life insurance policy generally grows tax-deferred, so you won’t pay taxes on any earnings as long as the policy remains active. Your beneficiaries will receive the death benefit when you die as the insured. Remember that since a permanent life insurance policy covers your entire life, it typically costs more than term life insurance.

Determining your financial needs

Various factors will help you determine how much coverage you need, including your current age, how many people depend on you financially, your budget, and what expenses your loved ones will need to cover. If you’re on a tighter budget or have a young family, term life insurance may suit your needs. If you’re seeking coverage for your entire life or wish to have a policy that can build cash value, then permanent life insurance may be the right coverage for meeting your goals.

Both types of coverage can bring valuable protection to your financial plan and ensure your loved ones have a financial safety net for the future. As you explore your life insurance options and the length of coverage you’ll need, here are several expenses to consider:

  •  Amount of coverage you can afford
  •  Amount of coverage you qualify for
  •  Funeral costs and other final expenses
  •  Outstanding debts
  •  Day-to-day living expenses for your family
  •  Mortgage or rent costs
  •  Childcare expenses
  •  College costs for your children
  •  Medical bills
  •  Taxes

As you explore your life insurance options, you may consider a term length that covers your financial obligations and outstanding debts. For example, if you have a 20-year mortgage on a house, you will likely want to choose a term of 20 years or more to ensure your mortgage payments are covered. Your selected term length should also cover you during the years that your family relies on you financially, especially when your children are still at home. List your financial obligations and the years needed to pay down the balance. Once you determine your costs and their timeline, you’ll better understand how long your life insurance should last. If the total number of years fall between available term periods, it may make sense to round up your coverage length.

Consider your eligibility

As you determine how much life insurance coverage you need and fits into your budget, you will also want to consider your eligibility for life insurance. For term life insurance, the coverage length is typically dependent upon your age and 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 may have on choosing a term length. Since you may be at a potentially higher risk for health issues, you may be limited to shorter coverage. However, 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 financial professional to understand your options.

If you’re interested in life insurance and what type of coverage may be a good fit for you, meeting with a financial professional can help you better understand your options and how to protect your loved ones’ future.

Neither Midland National nor its agents give legal or tax advice. Please consult with and rely on a qualified legal or tax advisor before entering into or paying additional premiums for such arrangements.

Life insurance policies have terms under which the policy may be continued in effect or discontinued. Permanent life insurance requires monthly deductions to pay the policy’s charges and expenses, some of which will increase as the insured ages. These deductions may reduce the cash value of the policy. The current cost of insurance rates and current interest rates are not guaranteed. Therefore, the planned periodic premium may not be sufficient to carry the contract to maturity. For costs and complete details, refer to the policy or call or write, North American Company for Life and Health Insurance at One Sammons Plaza, Sioux Falls, SD 57193. Telephone 877-872-0757.

Policy loans from life insurance policies generally are not subject to income tax, provided the contract is not a Modified Endowment Contract (MEC), as defined by Section 7702A of the Internal Revenue Code. A policy loan or withdrawal from a life insurance policy that is a MEC is taxable upon receipt to the extent that the contract's cash value exceeds the premium paid. Distributions from MECs are subject to federal income tax to the extent of the gain in the policy, and taxable distributions are subject to a 10% additional tax before age 59½, with certain exceptions. Policy loans and withdrawals will reduce cash value and death benefits. Policy loans are subject to interest charges. Consult with and rely on your tax advisor or attorney for your specific situation.

The primary purpose of life insurance is to provide a death benefit to beneficiaries. Because of the uncertainty surrounding all funding options except savings, it is critical to make personal savings the cornerstone of your college funding program. However, even a well-conceived savings plan can be vulnerable. Should you die prematurely, your savings plan could come to an abrupt end. To protect against this unexpected event, life insurance may be the only vehicle that can help assure the completion of a funding plan. In addition to the financial protection aspect of insurance, the tax-deferred buildup of cash values can be part of your college savings plan. Generally, if the policy is not a Modified Endowment Contract then tax-free withdrawals can be made up to the contract's cost basis. Moreover, if the policy is not a Modified Endowment Contract, then loans in excess of the cost basis are also tax free as long as the policy remains in force.

The term financial professional is not intended to imply engagement in an advisory business in which compensation is not related to sales. Financial professionals that are insurance licensed will be paid a commission on the sale of an insurance product.


REV 8/2023