Term life insurance is one of the simplest and most affordable types of life insurance. Because of that, it’s no surprise that it’s a good choice for many families.
When shopping for a term life insurance policy, one of the most important decisions you’ll need to make is on what term length you should choose. Term life policies are usually available in increments of 10, 15, 20 or 30 years. You should have coverage during the years your family is most financially vulnerable, which is usually when you have young children in the house, limited assets or savings, and considerable co-signed or shared debts.
It’s easy to default to “more is better than less,” but a longer term length will cost you more in the long run.
So how do you figure out how much life insurance do I need? A simple way is to just let an online life insurance calculator do the work for you. It will take into consideration your age, income, debts and family structure to provide you with a suitable recommendation.
However, if you want to go through the exercise of understanding for yourself what factors are considered in that recommendation (knowledge is power), here are the questions you’ll need to ask yourself.
How old are your children?
We love our children and want to do anything to protect and provide for them. Therefore, it’s important to consider your family’s financial situation if you were no longer around. Could your partner afford childcare and fulfill your plans to pay for college? For many young parents, the answer is no.
Your term life insurance length should last at least until your children are adults or are through college (depending on what your plans are for financial contributions). So, if you currently have a 3-year-old son, like me, the right term length to help protect his future would probably be at least 20 years. If your child is closer to 10, then perhaps a 15-year term is enough.
If you haven’t had children yet but are planning to, chances are you may need a 30-year policy to protect against the unexpected while your family grows from welcoming new babies to sending them off to college.
Keep in mind that there’s no magic age at which your children will become financially independent. A Pew Research Center analysis earlier this spring showed that the number of young adults who live with their parents continues to rise, even among young adults who have finished college and are employed. If that trend continues, your children may be dependent longer into adulthood than you were.
It may sound like a scary commitment, but there’s no need to fear the 30-year term length if you think it’s right for you. It can still be very affordable. For example, a 30-year, $500,000 policy would cost a healthy 33-year-old woman about $29 per month.
What kind of debts do you have?
Not only should your term length last until your kids are financially independent, but it should also last until your debts are projected to be paid off. Whether it’s 10 more years on your student loans or 28 more years on that mortgage, you’ll want to make sure that any debts you’d leave behind are protected against through your term length.
Death is hard enough on a family, you wouldn’t want to leave them with debts to repay without your assistance.
Does your partner rely on your income?
There are many perks to sharing your life with a partner – someone to share your life with, a soulmate to inspire you, a person to always take the middle seat when you travel together. With all these perks come shared financial choices and obligations that you’ve, well, kind of promised to be around for. If you share a mortgage or other debts with your partner, then consider a term length that would last until those debts are paid off. For most people, it’s a 30-year mortgage, which means a 30-year term length.
Additionally, we all want our partner to be financially comfortable, no matter what happens to us. The proceeds of your life insurance coverage can help replace your income, making things easier for your better half to carry on without you. When you retire, your income no longer comes from working, so you may not need as much coverage. While you’re young and healthy, a 30-year term length could provide much-appreciated peace of mind and financial protection until your partner reaches retirement.
Are you responsible for parents or elderly relatives?
Financial protection from life insurance isn’t just about your spouse and the kids. There has also been an increase in the number of people who care for their aging parents in their homes. While it’s impossible to know for sure if you’ll be in that situation in the coming decades, it’s worth considering what your plans are for caring for aging relatives currently or in the future. If you expect you’ll need to financially assist these family members, then consider a term length that lasts until something like social security kicks in.
How much life insurance can you afford?
At the end of the day, life is expensive, and every little bill adds up. While it’s important to not sacrifice your family’s financial future over “what ifs,” part of picking the right term length is about also saving yourself a dollar here and there. It’s better to have a thinner safety net than no net at all, so be sure you’re getting a policy that you can afford to pay for over the years.
There are a few ways to save on your life insurance policy that are in your control. Buying coverage while you’re young and healthy will get you the most affordable rates. Additionally, not overbuying on the amount of coverage needed and the term length will help out significantly. A life insurance calculator will provide you with an estimate that won’t leave you paying for unnecessary coverage. You can also get an estimate for how much a life insurance policy will cost and see how the pricing varies by term length and coverage amount.
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If a single policy is not the right fit, consider laddering
Sometimes one term life insurance policy can’t provide the exact coverage you need – maybe you buy a new house or have another baby (surprise!)… And that’s…okay.
Instead of canceling a policy and starting from scratch or putting off coverage until these milestones (unexpected or otherwise) occur, consider laddering coverage over time. You can have multiple policies – a 10-year policy with mortgage protection in mind and a 20-year policy to provide coverage while your children are young. In 10 years, when the mortgage is paid off, the shorter policy will expire, but you’ll still have 10 more years remaining on the longer policy to protect your children.
It may seem confusing at first, but a laddering strategy across multiple policies or carriers can give you the best of both worlds: locked-in low rates based on your current age along with term lengths that meet your specific needs, so you aren’t paying for too much coverage.
Buying the right life insurance policy for you
Your policy’s term length directly impacts your monthly premiums, so getting the right length for you goes a long way toward getting the best coverage at the best price.
But, buying the right life insurance policy doesn’t need to be complicated. Online tools can provide you with estimates for coverage amounts, term lengths, and pricing that’s actually simple.