When buying life insurance and meeting your family’s financial needs, one of the most critical decisions is choosing how long your policy should last. Your goal should be to ensure the policy continues as long as you have people who depend on you financially and can provide the funds necessary to meet your goals. You may wish to help your loved ones cover final expenses, pay off debt or have financial support for future needs. No matter your specific life insurance goals, how do you determine how long your policy should last? Here is some advice to help support your decision.
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. Each type of policy offers specific benefits and coverage periods that may fit your needs.
Term life insurance is a policy that has level premiums and lasts for a set period — usually 10, 15, 20, or 30 years. This type of life insurance includes a death benefit paid out to a beneficiary by the life insurance company if the insured dies during the term period. This generally tax-free lump sum can be used for various financial needs, including helping your family cover burial expenses, pay the mortgage, make debt payments, or save for the future. To continue coverage after the level term period, you may have the option 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 policies are usually the least expensive form of life insurance and can often fit into many budgets.
Choosing the most suitable length of coverage when you initially purchase your life insurance policy is essential because you will never be younger or healthier than you are right now. If you purchase coverage that doesn’t last long enough to meet your needs, purchasing additional coverage down the road may come with higher premiums due to your older age and potential health changes. There are also factors like inflation that could affect rates in the future. While purchasing a 30-year term policy will likely cost more than a shorter 10- or 20-year policy, you can rest assured knowing your loved ones will have the financial protection they need to carry on after you’re gone. Many policies also allow you to lock in your premium, so you won’t have to worry about a rate increase as you age.
Permanent life insurance is a policy that does not expire. It lasts the lifetime of the insured as long as premiums are paid. Permanent life insurance premiums are used to maintain the policy’s death benefit and to help build cash value that the policy owner can borrow. Following a waiting period after you purchase the policy, you may have the option to withdraw money to help with your financial needs. For example, if you have an emergency medical issue, the cash value can be used to pay for health care costs.
Policyholders may also tap into cash value for other reasons, such as helping to supplement retirement income. The cash value for permanent life insurance policies typically grows tax deferred, which means you don’t pay taxes on any earnings as long as the policy remains active. Your beneficiaries will receive the death benefit when you die as the insured. Remember that since a permanent life insurance policy provides coverage for your entire life, it is commonly a more expensive option than term life insurance.
Deciding how long you need coverage is based on your situation, including your budget, number of dependents, age, expenses, and outstanding debt. If you have a young family or a tighter budget, term life insurance may be a good fit. If you wish to have coverage for the rest of your life or would like your policy to build cash value, permanent life insurance may be a more suitable option.
Both types of coverage can bring valuable protection to your financial plan and ensure your loved ones have a financial safety net for the future. With that in mind, several factors should be considered to help inform your length of coverage decision, including:
As you explore your life insurance options, you may consider a term length that covers your financial obligations and outstanding debts. For example, if you have a 25-year mortgage on a house, you will likely want to choose a term of 25 years or more to ensure your mortgage payments are covered. Your selected term length should also cover you during the years that your family relies on you financially, especially when your children are still at home.
List your financial obligations and the years needed to pay down the balance. Once you’ve pinpointed these costs, you’ll better understand how long your life insurance should last. If the total number of years falls between available term periods, it may make sense to round up your coverage length.
Along with how much life insurance you need or can afford, your eligibility for a life insurance policy will also come into play. In looking at term life insurance, the coverage length is typically 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 may have on choosing a term length. Since you may be at a potentially higher risk for health issues, you may be limited to shorter coverage. However, 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 financial professional to understand your options.
To explore the different types of life insurance and which length of coverage makes the most sense for you, consider meeting with a financial professional to discuss your goals and create a plan that helps ensure your loved ones are financially protected now and in the future.
Neither Midland National nor its agents give legal or tax advice. Please consult with and rely on a qualified legal or tax advisor before entering into or paying additional premiums for such arrangements.
Life insurance policies have terms under which the policy may be continued in effect or discontinued. Permanent life insurance requires monthly deductions to pay the policy’s charges and expenses, some of which will increase as the insured ages. These deductions may reduce the cash value of the policy. The current cost of insurance rates and current interest rates are not guaranteed. Therefore, the planned periodic premium may not be sufficient to carry the contract to maturity. For costs and complete details, refer to the policy or call or write Midland National Life Insurance Company, Administrative Office, One Sammons Plaza, Sioux Falls, SD 57193. Telephone 800-923-3223.
Policy loans from life insurance policies generally are not subject to income tax, provided the contract is not a Modified Endowment Contract (MEC), as defined by Section 7702A of the Internal Revenue Code. A policy loan or withdrawal from a life insurance policy that is a MEC is taxable upon receipt to the extent that the contract's cash value exceeds the premium paid. Distributions from MECs are subject to federal income tax to the extent of the gain in the policy, and taxable distributions are subject to a 10% additional tax before age 59½, with certain exceptions. Policy loans and withdrawals will reduce cash value and death benefits. Policy loans are subject to interest charges. Consult with and rely on your tax advisor or attorney for your specific situation.
The primary purpose of life insurance is to provide a death benefit to beneficiaries. Because of the uncertainty surrounding all funding options except savings, it is critical to make personal savings the cornerstone of your college funding program. However, even a well-conceived savings plan can be vulnerable. Should you die prematurely, your savings plan could come to an abrupt end. To protect against this unexpected event, life insurance may be the only vehicle that can help assure the completion of a funding plan. In addition to the financial protection aspect of insurance, the tax-deferred buildup of cash values can be part of your college savings plan. Generally, if the policy is not a Modified Endowment Contract then tax-free withdrawals can be made up to the contract's cost basis. Moreover, if the policy is not a Modified Endowment Contract, then loans in excess of the cost basis are also tax free as long as the policy remains in force.
The term financial professional is not intended to imply engagement in an advisory business in which compensation is not related to sales. Financial professionals that are insurance licensed will be paid a commission on the sale of an insurance product.