People buy life insurance for different reasons. Their reasons affect how much coverage they buy and the term length they choose. Let’s talk about how to decide how long your term life insurance coverage should last.
There are five chief factors to consider when deciding what term length you need:
- Aging relatives
Do you have children? If so, how old are they?
A good rule of thumb is to purchase a policy with a term length that lasts until your children are adults or through college (if you plan on financially contributing to their education.) For example, if your youngest child is already 10 years old, a 15-year term policy may be enough. However, if you haven’t had children yet but plan to, a 30-year term policy would be the better choice to ensure coverage lasts from infancy to adulthood.
Does your partner rely on your income?
If you and your partner don’t plan on having children and are financially independent from each other, then you may not even need life insurance coverage. However, if you two share financial obligations, such as a mortgage, then consider a term length that lasts until these combined debts are paid off.
What debt do you have?
Think of the debt you have. This may include credit cards, student loans, and mortgage payments. If these debts have the potential to fall solely on a loved one’s shoulders should you die prematurely, protect them by choosing a term length that lasts until your final debt is projected to be paid off. For most people this is your mortgage loan. For example, if you have a 30-year mortgage, get a 30-year term policy.
Are you a caregiver for any relatives?
Baby Boomers are retiring and living longer, and many are running out of savings. Seniors that need full-time care or can’t afford to live alone are moving in with their adult children. According to the website A Place for Mom, one out of every four caregivers lives with the elderly or disabled relative that he or she is caring for. So, how does this affect the life insurance policy you buy?
If you have a relative relying on you physically or financially (or both?) then consider a term length that lasts until you believe they no longer will be dependent upon you. This could be until funds like Social Security kick in or if they are no longer living. Obviously you cannot predict when someone will die, but, for example, if the relative you are caring for is 80 years old then a 30-year term policy is likely not necessary.
What can you afford?
Term life insurance is ideal for most individuals because it can be customized to fit most budgets. For example, if you want a 30-year term policy with a coverage amount of $750,000, but don’t believe you can afford to keep up with the premiums long-term, then consider instead a smaller coverage amount or shorter term. Consider the options below. The quotes are for a female applicant who is 40-years-old.
Option 1: 30-Year Term Policy with $750,000 in Coverage
Option 2: 20-Year Term Policy with $750,000 in Coverage
Option 3: 30-Year Term Policy with $500,000 in Coverage
If you’re looking to lower your premium costs, which option do you choose? Lower the coverage amount or shorten the term? The right option really depends on your situation. For example, if your mortgage loan is a 15-year term and your children are over the age of 10, then going with the 20-year term over a 30-year term is a logical choice. On the other side of the spectrum, if your children are still in diapers, then lowering the coverage amount and sticking with the 30-year term is probably the wiser choice. Buy what you can afford. Some life insurance is better than no life insurance at all.
Laddering Life Insurance Policies
There is one more strategy to consider when determining how much life insurance coverage you need. There’s no rule that says you can only own one individual life insurance policy. Owning more than one policy, each with different term lengths, is called laddering, or layering.
For example, say your largest debt is your mortgage. The loan balance is for $350,000 and it’s a 15-year term. Taking this into consideration, you probably only need a 15-year term policy, right? Well, let’s also say you have three children whom are 9 months old, two years old, and three. You and your spouse plan on paying for their college tuition. Your youngest won’t graduate college for at least 21 years.
Let’s think about this. You know you want protection of at least $350,000 for 15 years (the mortgage). According to The College Board, the average cost of an in-state public college is $24,610 per year. So, sending three children to college to obtain their Bachelor’s degrees will cost approximately $295,320 total. You’ll want this amount of protection for at least 20 years.
You could purchase one policy with a coverage amount of $650,000 and term length of 25 years OR you could purchase two policies — one with a coverage amount of $350,000 and term length of 15 years and a second one with a coverage amount of $300,000 and term length of 25 years. Consider the screenshots below. They are quotes for a 40-year-old female.
Option 1: One Policy
Option 2: Laddering Two Policies
As you can see from the screenshots, laddering the two policies would save you a few dollars each month. If you went with Option 2 to ladder the policies, after 15 years, the first policy would expire and you no longer would be paying for coverage you don’t need since your mortgage is now paid off. But you would still have the back-up 25-year term policy to financially protect your family.
Everyone’s needs are different and life changes. If you would like advice on how much life insurance is ideal for your particular situation, contact us at any time. You can also use our Life Insurance Needs Calculator to help point you in the right direction.
Photo credit to: Picsea