Choosing the Right Life Insurance Term Length

The term of your policy is the period of time, or number of years, during which your insurance provides coverage. Choosing the right life insurance term length is a key element of a sound financial plan.

Are you ready to purchase life insurance but have no idea about how long the term should be? You’re not alone. Figuring out the most suitable life insurance term length is a question on the minds of nearly everyone who seeks coverage.

The good news is that you can arrive at an answer just by knowing a few key facts.

Key Takeaways

There's no mathematical formula that tells you the exact, perfect number of years for which you need term life insurance coverage
In general, you should think in terms of your outstanding debts and all your major financial obligations
Start with the length of your mortgage, years left until retirement, and years until all your children are financially independent
It's usually best to opt for a longer term length than you need as it might be difficult to add or buy coverage when you get older

The two most important pieces of data when purchasing term life is the length of the term and the amount of coverage. Assuming you already know you want term rather than whole life, and that you have an amount of coverage in mind, you’re left with deciding on the final variable: your life insurance term length.

Most Common Life Insurance Term Length

According to Milliman, a Seattle-based consulting company, the most common term length is 20 years.

Length of term life policy	Percent of policies
30 years	15%
20 years	42%
15 years	12%
10 years	25%
5 years (renewable)	6%

To determine the right term to support your financial plans, you need to take into account key factors such as: how many years left until your plan to retire, how many children you have or plan to have, how many years until all the kids are financially independent, the number of years until your mortgage is fully paid off, and whether you want added years of coverage to benefit a widowed spouse.

All these are important things to consider to plan for the best coverage for you and your family.

Current Debts and Financial Obligations

Take a look at your financial obligations. Do you have a 30-year mortgage, long-term business obligations, or future college expenses for children?

In general, people try to match either the known length of their debt or their expected longevity with the policy’s length. Most people opt for at least 30 years of coverage, but your options usually range between 10 and 40 years in varying increments.

Making Predictions

It’s difficult to know what the future holds.

Maybe you’ll decide to have more children, buy or sell a business, encounter significant medical expenses, or just decide that you need more or less insurance coverage. In most cases, it’s wise to purchase a term that’s slightly longer than you currently think you’ll need.

In any case, you can always stop paying the premiums and simply cancel the policy if you ever decide you no longer want or need the protection.

Limits Set by Carriers

Some companies will limit the number of years of term insurance policies based on your current age. Generally speaking, the older you are, the less of a chance you’ll be able to buy coverage for the longest terms.

If your term life insurance expires before you die, it might be financially impossible to obtain coverage when you’re older or in poor health.

Budget

When it comes to policy premiums, or what you’ll be paying out each year the coverage is in effect, there are two essential points.

First, the greater the life insurance term length, the more you’ll pay. The math is based on logic because when you purchase a policy, you’re actually locking in the quoted rate.

Second, term policies last for fixed amounts of time, like 5, 10, 15, 20, and more years. So, you’ll want to round up to the next higher length if your needs fall in between. For instance, if you only want coverage until your expected retirement 18 years from now, you’d opt for a 20-year term.

There are various strategies to optimize the overall cost of your life insurance. For example, a life insurance ladder strategy allows to combine multiple term life policies, usually 3, to optimize the required coverage and its costs to the changing needs of the policyholder as he/she ages.

Finding the right life insurance coverage that fit your plans might seems complicated. Talk to your life insurance agent!