Buying life insurance is an essential step in financial planning. A life insurance policy protects your loved ones (spouse, children, and any other beneficiaries) from potential financial losses in case you die unexpectedly. It provides a safety net that they can rely on for lost income in your absence. The best part is that there are usually no limitations to what your beneficiaries can use life insurance payouts for. They can use the funds for anything, ranging from paying mortgage loans to meeting your final expenses.
One popular type of life insurance coverage is term life insurance, which provides temporary coverage for a specified period. But what does term life insurance mean and how can you use it to protect your dependents? Here’s the lowdown on everything you need to know about term life insurance policies and the best length for one.
What is Term Life Insurance?
A term life insurance policy is an insurance contract between you (the policyholder) and your insurance company. Under this contract, you agree to pay premiums for a predetermined term, usually between 10 and 30 years. In exchange, the insurance provider agrees to pay a death benefit equal to your coverage amount to your named beneficiary when you pass away.
The main distinctive feature of term life insurance is that it covers you for a specific length of time. The insurance company pays a lump sum benefit if you die within that period. Keep in mind that your insurance coverage must be in force at your time of death for the insurer to pay the death benefit. This means that your premium payments must be up to date.
How Does Term Life Insurance Work?
Term life insurance is the simplest and most straightforward form of life insurance. You essentially pay a monthly premium for the agreed amount of time – say 10, 15, 20, or 30 years – and if you die within that time, the insurance company gives your named beneficiaries a lump sum payout. Since it offers coverage for a set period of time term life insurance protects you and your family right when you need it and for as long as you need it.
For example, you can take out a term life insurance policy for 20 years to cover the period when your kids are in school and your house is not paid off yet. If you die within those 20 years, your life insurance company will give your family a death benefit that’s equal to your coverage amount. They can use the cash to pay off mortgage loans and finance the kids’ education.
What is the Difference Between Term and Whole Life Insurance?
Whole life insurance is a type of permanent life insurance policy. While term life insurance protects you for a specific period of time, whole life insurance covers you for a lifetime. In other words, whole life insurance doesn’t have an expiration date unlike term life insurance which expires at the end of its term length. You and your beneficiaries won’t get a payout if you outlive a term life insurance policy. However, the insurance company can return your premium contributions if you have a return of premium rider. This is different from whole life insurance which virtually has a guaranteed payout.
Additionally, whole life insurance accumulates cash value over time, which makes it more expensive and complex compared to term life insurance policies. You can use the cash build-up of a whole life policy as savings or as collateral for securing a loan. On the other hand, a term life insurance policy’s lack of cash value makes it simpler and more affordable.
So, which is better term or whole life insurance? There’s no single answer to this question because each type of coverage is suitable for different situations. Generally, a term life insurance policy is ideal if you want temporary coverage for a specific period of time. It’s also a great choice if you want to keep your monthly premiums low and still enjoy life insurance coverage. On the other hand, permanent life insurance policies like whole life insurance are suitable for lifelong coverage that doesn’t expire. It’s particularly a good choice if you want to build cash value that you can tap into for investments and accessing credit.
Choosing the Right Term Life Insurance Length
The term length of an insurance policy refers to the number of years that the policy’s coverage will last. If you die within this time, your family gets a death benefit from the insurance provider as long as you keep up with premium payments. With that in mind, what is the best length for term life insurance?
When shopping for term life insurance, you want to choose a term length that will cover you and your family for as long as you need. If you have children, a good rule of thumb is to choose a policy length that will cover you until your kids are out of school and possibly out of the house. This creates a reliable financial safety net for their education. Otherwise, you can also consider a length that will see you complete all your major payments and investments, including mortgages, student loans, and credit card debts.
For example, you can choose a term length that will cover you until you finish paying your mortgage. Most mortgages have a maximum repayment period of 30 years, which is also the maximum term length that insurers give for term life insurance policies. Bear in mind that the longer the coverage period, the higher your monthly premiums are likely to be. So, a 30-year term life policy will have higher monthly premiums than a 20-year policy.
That said, it’s generally cheaper to get life insurance coverage when you’re younger. The premium rate for young adults is lower than that of their older counterparts because the younger you are the longer your life expectancy and the lower the risk of the insurance company having to pay a death benefit.
Factors Influencing Term Length Selection
Depending on your personal situation and needs, you can choose between short-term (generally 10 to 15 years) and long-term (generally 20 to 30 years) life insurance coverage. Some factors can make one option more attractive than the other:
Age and Life Stage
The younger you are, the longer the term length you can qualify for when applying for a term life insurance policy. The opposite is also true: if you’re in your senior years, many insurers may feel reluctant to approve you for long-term coverage. In fact, some insurance providers may not offer term life coverage to applicants who are 60 years or older. Therefore, if you are younger, you may have more options to choose from. But if you are older, your insurance term length options may be limited.
Beyond that, your stage in life can also influence the best length for your term life insurance coverage. If you are a young adult in your 20s or 30s just starting a family perhaps with a spouse and kids, you might want to look at long-term life insurance policies that will provide coverage through the major milestones in your life. You want a policy that will protect your family for as long as they depend on you. This is typically through your working years as you support your family with upkeep and education costs. A 30-year (or at least 20-year) term life policy can be a good fit because it will cover you until your kids graduate and possibly start living on their own.
A short-term life insurance policy may make more sense if you are older and all your children are financially independent. In this case, a 10- or 15-year policy can act as a good source of emergency funds in the unfortunate event that you pass away. Your family may use the policy’s payout to cover end-of-life expenses, if any. Fidelity Life’s RAPIDecision® Senior Life Term provides up to $150,000 for such expenses.
Financial Goals and Objectives
Your financial situation and goals will also determine the best length for your term life insurance policy. For one, choose a policy whose premiums you can afford. Generally, the shorter the term length, the lower the monthly premiums. Start by getting term life insurance quotes from multiple providers and compare them against your current income then choose one that you can comfortably pay for. That said, if your policy expires and you have to renew or take out a new one, the insurer may charge a much higher premium. That’s something to keep in mind before you fully commit to a short-term policy.
Debts and other financial milestones can also play a part in determining the most suitable length for term life insurance. You essentially take out a term life insurance policy so that if anything happens to you, your family will be able to get back on its feet. Their ability to bounce back financially can be hampered if you have debts that may be collected and mortgages that are subject to foreclosures. But with a life insurance payout, your family can cover these debts and reorganize.
If you have a mortgage loan, you may want to consider a term life insurance policy that’s equal, or better yet, just longer than the mortgage repayment period. That will allow your family to retain the house using the insurance payout. So, if you have a fairly new 30-year mortgage, it makes sense to match it with a 30-year term life insurance policy. If you’ve paid down the mortgage and are left with 10 years or so, you can take out a 15-year term life insurance coverage.
In case your most pressing debts are ones that can be paid off quicker (think credit cards, student loans and medical bills), then a shorter life insurance policy can offer the necessary coverage for lower monthly premiums. A good example is Fidelity Life’s RAPIDecision® Quick Term Life Insurance which provides up to $250,000 for as low as $15.01 for a 10-year term length and $16.75 for a 15-year term.
Health and Medical History:
Your eligibility for longer life insurance terms can depend on your health status. A life insurance company can deny your application for 30-year terms if you’re in poor health, have pre-existing medical conditions, or your family has a history of certain diseases like cancer. That’s because prevalent health issues generally lower your life expectancy and make you a high-risk person. So, while they may approve shorter term plans like 10-years, longer plans may be hard to get.
Keep in mind that many life insurance companies usually perform a consented medical exam, pull your medical records, and check your prescriptions to verify your health status. Some may agree to insure you at a higher premium even if the medical exam and records show that you’re in poor health. But you’ll want to check with the company first to see if they can accept your application and by how much the premium bump will be.
Common Term Length Options
Term life insurance lengths range from 10 to 30 years with the most common being 10, 15, 20, and 30-year terms. The shorter the term length, the shorter the coverage period and the longer the term length, the longer the coverage period. So, a 30-year term policy will cover you for 30 years but a 10-year policy will only cover you for 10 years.
The biggest draw to long term life insurance policies of 20 to 30 years is that they provide lengthy protection. They are long enough to cover most of the financial obligations you may have, including mortgages, student loans, education fees for kids, personal loans, and credit card debts. If you get the policy when you’re still young (in your 20s or 30s), you can lock in a lower rate for the entire duration of coverage. Your monthly premiums will remain the same even if other factors like your health status change.
Finally, longer term life insurance policies can help you avoid the need to apply for more coverage when they expire because they generally cover most of your lifetime. If you take a shorter policy, it may expire before the desired period of coverage ends. That said, long term life insurance policies generally cost more than short ones in terms of monthly premiums.
Shorter term life policies of 10 to 15 years cost less but they also offer coverage for a shorter period. Besides affordable premiums, their biggest advantage is that they can help you navigate very specific stages in life. For example, if you switch jobs to a high-risk industry, you can tailor your policy to cover you for the years that you’ll be employed at your new workplace. Besides, they can be great for covering short-term debts like credit cards and some student loans.
How Much Does Term Life Insurance Cost?
As you weigh between long- and short-term life insurance coverage, the next obvious question is: how much is term life insurance? Alongside term length, your monthly premium cost will boil down to how much coverage you want. The more the coverage amount the higher the cost.
The good news is that term life insurance is a lot more affordable than you might think. With Fidelity Life, premium rates for a $250,000 coverage amount start at $15 per month for a healthy, 25-year-old, nonsmoking female and $20 per month for a healthy, non-smoking, 25-year-old male. Premium increases with coverage amount, but even $1 million of coverage only costs a monthly premium of $45 and $60 for healthy, 25-year-old, non-smoking female and male applicants respectively.
Besides coverage amount and term length, your exact premium will also depend on other factors like your health status, lifestyle, criminal history, and driving habits – all of which contribute to your risk level. Below is a chart that can give you a good idea of the monthly premium to expect at different age brackets for 10 and 20-year term life insurance:
| GENDER | AGE | 10-YEAR TERM | 20-YEAR TERM | ||||||
| $100K | $250K | $500K | $1M | $100K | $250K | $500K | $1M | ||
| Male | 25 | $12 | $20 | $35 | $60 | $15 | $30 | $45 | $75 |
| Female | 25 | $10 | $15 | $25 | $45 | $12 | $25 | $38 | $63 |
| Male | 30 | $15 | $25 | $43 | $75 | $18 | $35 | $53 | $88 |
| Female | 30 | $12 | $18 | $35 | $60 | $15 | $28 | $43 | $70 |
| Male | 35 | $20 | $33 | $55 | $95 | $23 | $45 | $68 | $113 |
| Female | 35 | $15 | $25 | $43 | $70 | $19 | $35 | $55 | $90 |
| Male | 40 | $28 | $45 | $75 | $130 | $28 | $55 | $83 | $138 |
| Female | 40 | $20 | $33 | $53 | $90 | $22 | $45 | $68 | $110 |
| Male | 50 | $45 | $75 | $130 | $220 | $50 | $100 | $150 | $250 |
| Female | 50 | $30 | $50 | $88 | $150 | $35 | $70 | $105 | $175 |
| Male | 60 | $75 | $130 | $220 | $375 | $88 | $175 | $263 | $438 |
| Female | 60 | $50 | $88 | $150 | $255 | $60 | $120 | $180 | $300 |
The more coverage you get, the higher the premium rate. Men also pay more compared to women because insurance companies perceive women to have longer life expectancies. This makes them less risky compared to men. If you want to know the exact premium you qualify for based on the term coverage you need, consider pulling personalized quotes from various life insurance providers. The Fidelity Life quote generator is a good place to start.
Choosing the Right Term Length
What is a good term length for life insurance coverage? There’s no single answer to this question because the right term length for you should depend on your individual life insurance needs. The term policy you choose should offer you peace of mind for as long as you need it. As such, it’s important to think of the three main things that have the greatest financial impact on your life: the term on your mortgage, the ages of your children, and the number of years left until you retire.
The ideal term life insurance policy should cover your mortgage entirely plus a few extra years. It should also cover all the years that your children depend on you until they leave the house. Finally, it should be able to replace your income for the time that’s left before you retire.
If you have a 30-year mortgage and anticipate that your children will be independent in 20 years’ time, it makes sense to prioritize the mortgage because it’s longer. Therefore, a 30-year term policy would be suitable. On the other hand, if you have paid down most of your mortgage and you only have about 10 years left but you anticipate that your kids will be independent within 20 years, then a 20- or 25-year life insurance plan sounds more suitable.
Make sure to balance affordability with adequate coverage amount. Don’t choose the least expensive policy just for it to expire and force you to apply for more coverage. Additional coverage will cost you significantly more because your age will be advanced.
Tailoring Term Length to Specific Situations
One advantage of term life insurance is that it’s flexible and the application process is generally straightforward. As such, you can tailor your term policy length to suit your specific situation, particularly if you have a young family or if you are an empty nester.
How to Choose a Length for a Term Life Insurance Policy for a Young Family
If you have a young family, more so one with children and young dependents, you have an entire lifetime ahead of you. A long term life insurance policy of 20 to 30 years can help you protect your loved ones during the critical periods of raising children, acquiring a home, paying off debts, changing jobs, and so on. It will help cover your entire family from the time the kids are in diapers up until they are able to depend on themselves.
How to Choose a Length for a Term Life Insurance Policy for an Empty Nesters
If you are a retiree or plan to retire in the next 10 years or fewer, your financial obligations are likely fewer than those of a young family, especially if your dependents can stand on their own. In this case, a short term life insurance policy of 10 years may be more suitable. It’s enough term length to supplement your retirement savings and cover any remaining financial obligations, from credit card debts to remaining mortgage loans and anything in-between.
Annual Renewable Term Life Insurance Policies
One of the best features of term life insurance policies is that they are flexible. Most of them (but not all) are renewable on an annual basis when they expire, provided you are still in good health. In fact, many life insurance providers won’t request a new medical exam when you renew a term life insurance policy. However, some may revisit your existing health issues (if any) to see if your status has deteriorated to the point of rendering you uninsurable.
Renewing a term policy may be ideal if you want to extend your coverage beyond its initial term. Alternatively, you may convert the policy altogether from a term life policy to a permanent life policy. Typically, this conversion doesn’t require a new medical exam. Your new permanent policy will come with all the benefits of whole life insurance, including cash value accumulation and lifelong coverage.
If you still have questions about term life insurance and the policy type that best fits your needs, contact one of our agents at 844-383-0884 to explore your options and to get a free quote today.
