How long should your life insurance last?

When it comes to buying life insurance, one of the most important decisions is how long your policy should last. Your goal should be to make sure the policy continues as long as you have people who depend on you financially, and until your last major financial obligation is paid. But how do you determine that? Here is some advice.

What length of coverage is available?

When figuring out how long you need life insurance, you must first consider the two main types of policies--permanent life insurance and term life insurance--and how long they will cover you for. Both types of policies offer specific benefits that may fit your individual needs.

Permanent life insurance

Permanent life insurance is a policy that does not expire. It lasts the lifetime of whoever is insured, as long as premiums needed are paid. Permanent life insurance premiums are used to maintain the policy’s death benefit and allow the policy to build cash value that can be borrowed by the policy owner. Once a waiting period expires after you buy, you’ll have the option to withdraw money to help you when you need it most. If you have an emergency medical issue, for example, the cash value can be used to pay for health care costs. 

Many policyholders also tap into cash-value for other reasons, such as building a nest egg for retirement or supplementing retirement income. The cash value for permanent life insurance policies grows generally tax-deferred, which means you don’t pay taxes on any earnings as long as the policy remains active. When you die as the insured, your beneficiaries will receive the death benefit. Keep in mind that because a permanent life insurance policy provides coverage for your entire life it is a more expensive option. 

Term life insurance

Term life insurance is an easy-to-understand type of policy that has level premiums that last for a set number of years. Terms typically last 10, 15, 20, or 30 years. This type of life insurance includes a generally tax-free death benefit in the form of a lump sum that’s paid out to a beneficiary by the life insurance company if you die during the term period. This generally tax-free lump sum can be used for a variety of things, from burial expenses to mortgage and debt payments, to living expenses for your family, to donations. To continue coverage after the level term period, you’ll have 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 is usually the least expensive form of life insurance.

What factors determine term length?

If you decide to buy permanent life insurance, the length of your coverage will last for as long as you pay the required premiums. Your other option – term life insurance – is the typical choice for most life insurance shoppers because it’s simple and cost-effective. If you’re on a tight budget, or just starting to build your financial future, you will likely gravitate toward term. As mentioned above, you have a choice in how long the term lasts. When deciding that term, remember that the reason you’re buying life insurance is to ensure your loved ones are taken care of after you pass away. The payout from your term life policy can provide a financial lifeline for your family. With that in mind, several costs should be considered before making your decision including:

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

You want to choose a term length that covers your financial obligations and outstanding debts. So, for example, if you have a 25-year mortgage on a house, you should buy a term of 25 years or more to ensure your mortgage payments are protected. Your selected term length should also cover you during the years that your family relies on you financially. This would include the time when your children live with you. Many kids move out in their twenties, but if you have a special needs child, you may be financially responsible for his or her care for much longer. 

Make a list of your financial obligations and the number of years needed to pay each one off. Once you know your longest-lasting cost, you’ll have a good idea of how long your life insurance should last. If that top cost falls in between available term periods, simply round up your coverage length. 

How much insurance are you eligible for?

Regardless of how much life insurance you need and can afford, your eligibility for your term life insurance policy will also come into play. Life insurance companies want to see evidence of insurability, or justification that you financially qualify for the amount of coverage you’re asking for.

The term length you can get is usually reliant on your age — it 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 might have when choosing a term length, but 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 life insurance agent about what you qualify for.

Should you consider a longer-term length?

It’s important to understand that if you don’t purchase a long enough term and need to buy additional life insurance coverage down the road, your premiums will likely rise will likely rise due to your older age and any health changes. It’s possible you won’t be able to afford added insurance. Spending money for a longer-term now will prevent that inflation and you can always cancel your policy without penalty if you do discover that the term you chose is too long. Your only cost will be the premiums that you’ve already paid.

Your life insurance rate is also at its lowest point it will ever be right now. Rates always go up as you age and your health risks increase.

There’s also inflation and other unexpected changes to the insurance industry that could raise rates in the future. It’s hard to tell what factors may alter a policy 20 years from now.

Purchasing a 30-year term will certainly cost more than a shorter 10 or 20-year policy, but it also means your loved ones are more likely to receive the benefits they need when you’re gone. You’ll also be able to lock in the premium when you buy. Not having to worry about rate increases as you age can give you peace of mind.

 Still not sure about how long your life insurance coverage should be? Discuss all the pros and cons of each with a financial professional.

B3-MN-2-21

REV 2/2021