How to Choose the Right Life Insurance Policy Term

Published FEBRUARY 19, 2015

Life insurance is one of the basic building blocks of a solid financial plan, but you don’t necessarily need it for your entire life. So how do you determine the proper term for a life insurance policy?

Most life insurance customers buy policies to provide for their dependents in the event of their untimely demise. For these customers, term life insurance is the way to go.

Term life insurance will pay out a set amount if you die while the policy is in force. Term policies are typically sold in increments of 10, 20 and 30 years. If you have children, it’s a good idea to factor their ages into your purchasing choice.

For example, if you buy term life insurance while your child is young – about age 4 – you’ll want a policy that will cover you until the child is an adult and won’t be as likely to need financial support.

In that case, you’ll probably want to get a 20-year policy. If you have more children later on, you may need to purchase an additional 10-year policy when that first 20-year policy concludes.

If your spouse is dependent on your income – for mortgage payments, debt and more – you may want to buy a policy that will last until you retire. For example, if you’re 25 and married, you may want to buy a 10-year policy now, and then purchase a 30-year policy at age 35. This will ensure your spouse is covered until the typical age of retirement.

You may need life insurance beyond the traditional age of retirement if you have a spouse who depends on you or a late-in-life family. You may also need life insurance into your senior years if you don’t have enough assets to cover your debts or funeral expenses. In those cases, you’ll need to factor premium payments into your retirement planning.

Conversely, you may decide to let your life insurance policy lapse if you get divorced or when your children reach adulthood. As you approach retirement, you may let a policy lapse if you find you have enough retirement assets to pay for funeral costs. Or if you’re in retirement with no dependents and no debt, a policy may not seem worth the cost.

Life insurance gets more expensive as you get older, so you’ll pay higher premiums as you age. Therefore, you may want to buy a longer-term policy when you are younger, if you can afford it.

Whole life insurance

While most customers choose term life insurance, there is also the option of whole life, which lasts your entire life and includes financial benefits beyond the death benefit. You’ll create a cash value account, get tax-free borrowing and may receive dividends. Whole life may be a good option as part of a more extensive financial plan.

However, letting a whole life insurance policy lapse is never a good idea. If you get a whole life policy, you need to continue to pay premiums throughout your entire life. Otherwise you will have spent much more money without reaping the benefits that can be used into retirement.

Depending on your individual needs, you should buy enough insurance to cover your debt, including any loans, mortgages, credit cards and more. You’ll also want a big enough benefit to provide an income replacement for your dependents. If you have any set financial goals for your family, such as college tuition or a wedding fund, you may want to add them to your coverage amount. Finally, you’ll want to include the cost of your death including funeral, burial, probate costs and any special arrangements.

When it comes to life insurance, you should get only the coverage you need. There are no one-size-fits-all answers. Assess your own situation and determine how much coverage you need.