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How Long Do You Pay For Life Insurance? Photo KnowInsiders

When you’re buying term life insurance, you have two main decisions to make: how much life insurance to buy and how long the coverage should last. You want the policy to continue until your last major obligation is taken care of. So, the duration of your financial commitments will generally determine how long your term life insurance policy should last.

How long is term life insurance?

Term life policies are generally sold in lengths of five, 10, 15, 20, 25 or 30 years. In some cases, you can find 40-year term life insurance. The longer the policy, the higher your life insurance quotes are likely to be. That’s because you’re locking in your rate for a longer time, and as you age, health problems tend to crop up and your likelihood of dying increases.

Another option is annual renewable term life insurance, which guarantees your ability to renew coverage annually for a set period of time without reapplying. But when you renew coverage, the premiums typically increase. As such, you’ll generally pay less over time for a standard level term life insurance policy.

Which term length is right for you?

Here are the most common term lengths and who they might be a good fit for.

Annual renewable term life is a good choice for people who have short-term financial obligations, or who want to cover a gap in employment until they get a new group life insurance policy through their next job.

5-year term life insurance may also be a good fit for someone with short-term financial obligations, such as a small loan or college fees.

10-year term life insurance may benefit parents or guardians with older children who still rely on their income, or someone approaching retirement who needs to cover the last leg of their employment.

20-year term life insurance is the most popular term length and can help cover the income of new parents or newlyweds as their family grows.

30-year term life insurance can help cover large, long-term financial obligations, such as a mortgage or college debt. This term length may also be a good fit for young applicants who want to cover the majority of their earning years.

If your longest-lasting financial obligation falls in between available term periods, round up. For example, if your mortgage will be paid off in 17 years, round up your term choice to 20 years.

How term length affects cost

The longer your term length, the higher your monthly premiums. Why? Because a longer term makes it more likely that the insurance company will have to pay out the death benefit.

For example, a 35-year-old female would pay $25.69 for a 20-year, $500,000 policy. But she would pay $37.35 for the same policy for 30 years.

The advantage of buying a policy with a longer term is that if you need more coverage later, you'll have already locked in lower premiums. You don't want to overpay for coverage you can't afford, however, so you should find a term length that fits in your budget. But remember: when your coverage expires, you should still have enough savings and assets to self-insure, especially for end-of-life care.

Getting the right term length is pivotal to protecting the financial security of your family. A policygenius agent can work with you for free to help you get the right amount of coverage.

Why you should consider a longer term length

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Photo KnowInsiders

Once you evaluate your financial obligations you can determine exactly how long your term life policy should last. In certain situations, it may be worthwhile to have a policy that lasts longer than necessary.

1. Your life insurance rates are currently lower than they’ll ever be in the future

The cost of life insurance increases 4.5-9% with every year you age and even more as your health changes. New diagnoses, either for you or even your siblings or parents, can increase your rates in the future when applying for a new policy. So if you buy a 20-year policy but need to extend your coverage down the road, you can expect to pay a lot more in your premiums.

Plus, inflation and industry changes mean you can’t predict what rates will be 20 years in the future. The rates for a 50-year-old can be costly enough now, but in 20 years they can become simply unaffordable.

2. Life happens

A shorter term length might make sense today, but many things that could happen in the future. Maybe you’ll have another child, stop working, or need to take care of your aging parents. As these big life events occur, your life insurance needs can change, and often grow.

End-of-life expenses should also be accounted for. Nursing homes average about $8,821 a month for a private room, according to Genworth’s 2020 Cost of Care survey – and the typical funeral can cost your loved ones $8,000 to $10,000. Even if your dependents no longer rely on you, your loved ones could still end up going into debt to cover the costs of your final rites.

Having some cushion coverage beyond your traditional needs can secure your loved one’s financial security, even if they’re not financially reliant on you.

3. If you need to, you can lower your coverage (and how much you pay)

It’s possible that 20 years into a 30-year policy you no longer need your life insurance coverage, and if that does happen you’re not stuck with your policy. At that point, you can lower the policy’s coverage amount, thus lowering your premiums, without going through underwriting again. Or — you can cancel your policy altogether. This is a much cheaper option than reapplying for a new life insurance policy with more expensive rates down the road.

How to determine the amount you need – and where to get it

If you have a young family, it will take many years of income to pay to feed, house, clothe, and educate your children through to adulthood. If you’re not there to provide for them, life insurance can help with those costs – but you have to make sure your policy’s death benefit is enough to do so. Here are a few general rules people use to help determine how much they need:

  • Get 10x your salary: This is one of the simplest rules to follow, and it can provide a useful cushion for your family – but it doesn’t take all your actual expenses and needs into account.
  • Get 10x your salary, plus college expenses: If you add $100,000 - $150,000 for each child, that can help ensure they can achieve more of the opportunities you want for them.
  • Use the DIME formula: DIME stands for Debt, Income, Mortgage, and Education. Total your debts, mortgage and college expenses, plus your salary for the number of years your family needs protection (e.g., until the children are out of the house), and that’s your coverage need.
  • Some financial representatives calculate the amount you need using the Human Life Value philosophy, which is your lifetime income potential – what you’re earning now, and what you expect to earn in the future. In its simplest form the philosophy suggests that you multiply your income by a variable based on factors such as age, occupation, projected working years, current benefits, etc.. As with every individual the amount of insurance you should purchase depends on many factors but a simple way to get that one number is to multiply your salary times 30 if you are between ages 18 and 40. The calculation changes based on your age group so refer to the chart below for your age group.

Age

Maximum Life Insurance

18-40

30 times income

41-50

20 times income

51-60

15 times income

61-65

10 times income

66-70

1 times net worth

71-75

1/2 times net worth

How a term life insurance policy works

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Photo KnowInsiders

It’s a contract. At its most basic level, a term life policy is an agreement between the person who owns the policy (the owner) and an insurance company: The owner agree to pay a premium for a specific term (usually between 10 and 30 years); in return, the insurance company promises to pay a specific death benefit in cash to someone (a beneficiary) upon the death of someone else (the insured). That benefit is usually tax-free (unless the premiums are paid with pre-tax dollars).

There’s an application process. You may have seen or heard ads that say things like, “A male non-smoker in his 30s can get a 20-year $500,000 term policy for under $30 a month.” Some people can get that much coverage for under $30 – but it’s not automatic. Before they give you a policy, the provider needs to assess how much of a risk you are to insure. This is called the “underwriting” process. They’ll typically ask for a medical exam to evaluate your health, and want to know more about your occupation, lifestyle, and other things. Certain hobbies like scuba diving are deemed risky to your health, and that may raise rates. Likewise, dangerous occupational environments – for example, an oil rig – also may raise your rates.

You need to choose a term length. One of the biggest questions to ask yourself is, “How long do I need coverage for?” If you have children, a popular rule of thumb is to choose a term long enough to see them out of the house and through college. The longer your term, the more you’ll typically pay each month for a given coverage amount. Nevertheless, it usually pays to err on side of getting a longer-term policy than a shorter one because you just never know what the future holds and it is generally easier to get insurance while you are younger and in good health.

Decide how much of a death benefit you want. You should consider getting enough coverage to care for your family’s needs if you’re not there to support them; in section 3 we’ll tell you a few different ways to figure out how much that is. Whatever coverage amount you need, it will likely cost less than you thought: A recent survey found that 44 percent of millennials believe that life insurance is at least five times more expensive than the actual cost.1

Name your beneficiaries. Who gets the benefit when you die? It doesn’t all have to go to one person. For example, you could give 50% to your spouse and divide the rest between your adult children. And while beneficiaries are typically family, they don’t have to be. You could choose to leave some or all of your benefits to a trust, a charitable organization, or even a friend.

READ MORE: What is Business Insurance: Definition, Types and Cost

The different types of term policies you can buy

As you shop around and start talking to companies or insurance agents you may hear about different kinds of term policies. They all provide a specific benefit over a specific term but may have very different bells and whistles and costs.

Level premium: Also called level term; this is the simplest, most common type of policy: Your premium stays the same for the entire term.

Yearly renewable term: Also called an annual renewable term. This policy covers you for a year at a time, with an option to renew without a medical exam for the duration of the term – but at a higher cost each year. Compared to a level term policy, your premiums will be slightly lower at first, but over a full 10, 20, or 30-year term you will pay more than you would with a level premium policy.

Return of premium: This type of term policy actually pays back all or a portion of your premiums if you live to the end of the term. What’s the catch? Your premiums could be 2-4 times higher than with a level term policy. Also, if your financial status changes and you let the policy lapse you may only get a portion of your premiums returned – or nothing at all.

Guaranteed issue: These policies are easier to get because they don’t require a medical exam and only ask a few simple health questions at most. This also means that the insurance company has to assume that you are a risky prospect who has health issues, so your premiums may be much higher than they otherwise would be. Also, the policy might not pay a full death benefit for the first few years of coverage. If you have health issues but are able to manage them, it will usually be worth your while to get a conventional term life policy that is underwritten (i.e., requires a medical exam).

How Long Do I Pay for Term Life Insurance?

The amount of time you pay for life insurance depends on a number of factors. If you have term life insurance, you’ll pay a premium for a specific period of time like 10, 15, 20 or 30 years, in accordance with the length of your term life policy. You’ll choose the term limit when you buy the policy and your beneficiaries will only receive the death benefit if you pass away while the policy is active.

After your initial policy term, you might have the option to extend your term life insurance coverage, depending on your contract. However, because your rate was guaranteed only for the original term of your policy, your new policy’s premium cost will likely be much higher when extending coverage past the initial term.

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