If you’re wondering how does a 10-year term life insurance policy fit into a retirement plan, we’ll offer some scenarios where our clients have chosen a shorter plan over a term life policy that lasts 20 to 30 years.
We’ll also show you how to get the best 10-year term life insurance rates, if you decide that type of policy is the right choice for your retirement planning.
First, we’ll cover the basics and explain what does 10-year term life insurance mean?
What Is 10-Year Term Life Insurance?
At Quotacy, we offer term life insurance with coverage lengths of 10, 15, 20, 25, 30, or 35 years. That means that your life insurance policy would insure your life for 10 to 35 years, depending on the amount of years you select.
If you would die during your term, your life insurance policy would pay out a death benefit to your loved ones. One of our agents talks about the death benefit as the suitcase of money your family gets when they most need it.
How big is that suitcase? It depends on you.
» Calculate: Life insurance needs calculator
We sell term life insurance policies with coverage amounts from $50,000 to $65 million+. The amount of money that you can select is dependent on your insurability limit. This is the total amount of coverage that can be bought on you at any given time across all of policies that insure your life.
Term Life Insurance Insurability Limit Guidelines
Here are some general guidelines about insurability limits related to term life insurance:
- If you’re 40 or younger, your life can be insured for up to 25 times your current annual income. Every ten years after age 40, this multiplier is reduced by 5.
- From ages 41 to 50, you can buy coverage for 20 times your annual income.
- From ages 51 to 60, you can buy 15 times.
- From ages 61 to 70, you can buy 10 times.
Many people retire by age 70. If you wish to buy a large amount of life insurance coverage after age 70, underwriters will review your application to review your net worth and estate tax considerations to see if they can issue a policy.
How Does 10-Year Level Term Life Insurance Work?
The younger and healthier you are when you purchase your term life policy, the lower your cost for life insurance will be. This makes sense because your likelihood of dying when you are younger and healthier is less…making you less of a risk to insure.
Level term life insurance means that your premium (monthly cost) for your policy will remain the same each month and won’t increase over time.
It’s wise to buy level term life insurance if you are on a fixed monthly budget and don’t want any surprises about the cost of your life insurance down the road.
What Are the Benefits of 10-Year Term Life Insurance?
The major benefit of term life insurance is its affordable cost. A 10-year term life insurance policy costs 7 to 10 times less on average than permanent (whole) life insurance. Many people who are nearing retirement don’t want to pay more for insurance than is necessary and they don’t wish to be overinsured.
So, a shorter term length, such as 10 years, can fill a gap while you are winding your career down, but don’t yet have your mortgage paid off. A 10-year term life insurance policy can protect the earned income of a spouse whose paycheck you are counting on as part of your retirement savings.
Many couples are playing catch up with their retirement savings, so to have a spouse die whose income you were counting on as part of your retirement nest egg, can be a big loss financially; in addition to the emotional loss of a soul mate.
Using 10-Year Term Life Insurance as Mortgage Protection Insurance
Even if you are not near retirement age, a 10-year term life insurance policy (or a longer term life policy, such as a 15- or 30-year policy ) is often a better investment than buying a mortgage protection insurance (MPI) plan. Here are a few reasons why:
- Mortgage protection insurance is limited to covering your mortgage while term life covers any type of debt (credit card, student loans);
- Mortgage protection insurance is more expensive than term life insurance as it is not medically underwritten;
- Mortgage protection insurance is not as customizable with riders or flexible terms as traditional term life insurance.
The only time MPI might benefit you is if you cannot qualify for traditional term life insurance as you cannot pass a medical exam.
Why Consider Term Life When You Plan for Your Retirement?
We already mentioned that many people near retirement use a 10-year term life insurance policy to cover the remaining years of their mortgage until it is paid off (as do younger people as well).
Another way that life insurance is used for retirement planning is to cover the loss of Social Security income, if a spouse should die. A term life insurance policy guarantees the death benefit amount at the time that the plan is purchased. So, unlike investment income that may fluctuate in value, the amount that will be paid out upon death is contractually fixed with life insurance.
Provide Financial Stability for Your Loved Ones
Through the fixed payout, a soon-to-be retiring couple (or their financial advisor) knows exactly how much income will be replaced through the death benefit of the husband’s or wife’s term life insurance policy, if the owner should die while the policy is active.
Financial security in retirement can be achieved by planning to have a variety of financial supports in place:
- Supplemental Health & Medicare
- Life Insurance
- Long-Term Care Insurance
- Social Security
- Pensions or Retirement Plans
But, many couples are catching up with saving for retirement in the last 10 years before their retirement. If one spouse whose income is relied upon dies within those 10 years, it can devastate the surviving spouse’s ability to adequately save for their retirement.
» Learn more: Financial Opportunities as You Reach Age 50 and Beyond
As we noted earlier, the premiums for a 10-year term life insurance policy can be relatively inexpensive and provide a financial safety net for those who are in their prime years of saving for retirement.
4 Financial Decisions to Make When Planning Your Retirement
When planning your retirement, you’ll need to determine four factors:
- Retirement age
- Financial needs
- Retirement budget
- Life insurance plan
The average retirement age is 62, but you might not fit the average. Here we go over some things to consider as you do your retirement planning or begin to think about doing it.
#1 Determine the Age You Plan to Retire
Vanguard has created a nice interactive tool based on mortality data from the Society of Actuaries that allows you to enter your age, gender, and select a time frame. It will show you your probability of living until that age.
For example, I found out that I have a 30% probability of living until age 90; 67% probability to age 80; and a 4% probability to age 100.
Knowing how likely it is that you will live to ripe old age could motivate you to save more and take better care of your health.
Ask yourself if your retirement savings and investment plan is sufficient to keep pace with your potential life expectancy?
Jim Otar, CMT, CFP, M.Eng. is a financial planner whose advice is respected among his peers. He should consider republishing his book, Unveiling the Retirement Myth, as used copies are selling for over $100 on Amazon.
He makes a very good case for figuring out your sustainable withdrawal rate (SWR) as part of your retirement planning based on actual market history data (think: adverse market conditions not ideal annual portfolio returns). Your SWR is the largest amount of income that you can periodically take out of your investment portfolio without depleting the assets.
If you work with a financial planner, Mr. Otar suggests making sure that their retirement plan for you addresses three risks related to your retirement income:
- Longevity Risk (living too long),
- Market Risk (running out of money in your investment portfolio), and
- Inflation Risk (inability to maintain purchasing power).
A proper retirement plan addresses all three risks based on calculating the longevity risk by looking at mortality tables.
Using his calculations, I decided to figure out my own SWR based on living until 95:
|Sustainable withdrawal rate until age 95|
|Retirement Age||Equity/Fixed Income||Sustainable Withdrawal Rate|
You can see that in essence the earlier that I retire, the lower my sustainable withdrawal rate is (3% versus 5%). This is true because any percentage that I spend that is higher than the long-term growth rate of my portfolio would decrease my principal’s ability to generate more money.
For example, if my retirement portfolio is valued at $1,000,000, and I withdraw 5% ($50,000) annually, but my returns are 3% ($30,000), then I am eroding my portfolio’s ability to sustain me over time by withdrawing too much every year.
The next step in my retirement planning is to figure out how much money I would need to save in order to be able to withdraw around 4% per year without running out of money by age 95.
I also need to figure out how much money I will need per month in retirement. Since I am not great at math, I need the help of a calculator to figure this out.
#2 Estimate Your Financial Needs After You Retire
Nerdwallet has a helpful retirement calculator that asks you to enter your:
- Household Income
It allows you to play with three sliders and adjust for:
- How much you save each month.
- How much you intend to spend each month once you retire.
- The age you wish to retire.
It will then tell you how close you are to reaching your retirement savings goal and give you advice on jumpstarting your retirement planning, reducing your current bills, eliminating debt faster, and how to grow your money.
Using these handy online calculators can help you see how saving earlier in life (hello, millennials working the gig economy) and investing wisely can really compound in benefit over time.
#3 Create a Retirement Budget
Luckily I have been using Quicken software to track all of my spending since age 30. Most of us can add and subtract just fine, but it’s our emotional spending habits that tend to destroy our budgets and prevent us from saving today for our future 90-year-olds.
If you haven’t been tracking your money life, do yourself a favor and start doing it online at Mint. You’ll get a clear picture of where your money goes each month now and that can help you create a realistic retirement budget for your future.
Using Quicken, I can see that I spend too much money overall on gifts (with love from Kate and Karma Stacks).
I don’t regret this one bit, but I do know that I need to be aware of how being generous now might mean that I will have less to live on later in retirement. Knowing this, I can make a conscious choice about how generous I can afford to be. It also makes me appreciate the sacrifices that my friends and family make by being generous to me.
Use budgeting as a way to live more fully aware of what you do (or don’t do) each moment. If you have this attitude, then keeping track of your finances becomes a self-awareness tool rather than a have-to-do.
Modify Your Current Budget to Plan Your Retirement Budget
Take your current budget and shift into retirement planning mode.
How much less do you think you’ll spend once you’re retired? 30% less? 20% less?
For example, your career clothes expenses will go down as you may not need new, expensive suits and your mortgage (hopefully) will be paid off. But, you may be taking more trips or spending more on medical care than before.
If you don’t know how much you will need, ask retired folks you know to share with you what their lifestyle costs. Then see if you plan on living in a similar way or differently. Most older people I know are very happy to be asked to share their hard-earned wisdom. Make sure if you ask that you take time to listen thoughtfully. That is a gift we can give to our elders no matter how much money we have (or don’t have) anytime.
Most financial planners advise us to replace 70% to 90% of our annual earned income (prior to retirement) through our savings and Social Security. If you earn $75,000 per year, that would be:
- $52,500 for each year of your retirement (70%)
- $60,000 for each year of your retirement (80%)
- $67,500 for each year of your retirement (90%)
If you retired at age 70 and lived until age 95, you would have to save 15 years of earned income. If you saved 80% of your pre-retirement earned income, that would total $900,000.
Doing the math, you see why people often feel that they need to have at least $1,000,000 (or more) saved for retirement.
#4 Get Life Insurance
After you’ve worked hard to save for your retirement, you’ll want to protect that nest egg with life insurance.
» Compare: Term life insurance quotes
If you will depend on your spouse’s earned income to contribute to your retirement years, consider getting a 10-year (or longer term) life insurance policy to replace their potential earned income (retirement savings contributions).
Life insurance’s primary purpose is to replace earned income or savings when a family really needs it. You hope never to need a life insurance payout. But, if you do, you’ll be glad that your loved one provided for you from your years raising children together through retirement.
We’re happy to help you get the right term life insurance policy for your needs—one that is affordable and provides excellent coverage into your retirement years.
Using our free comparison tool, you’ll be able to compare quotes from trusted (read: financially stable) life insurance companies side-by-side and apply online in less than five minutes.
About the writer
Quotacy is the country’s leading broker for buying life insurance online. We are obsessed with making it easy for everyone who has loved ones who depend upon them to have life insurance.