Image: Danielle MacInnes
So, you’ve made the decision to buy life insurance? Good for you! It’s a major step in preparing you and your family for years of financial security. You’ve done the research on buying term life insurance or permanent life insurance and have decided to go with term insurance. But what term should you choose? In this Insurance 101 post we cover some of the factors to consider when deciding on a term for your term life insurance policy.
Do You have children?
Many of our clients contact us about buying their first life insurance policy when they decide to have children. Indeed, in the event one parent dies prematurely, life insurance can guarantee that there are adequate funds in place to pay for child support, the children’s education, and perhaps income replacement, so that the surviving parent can stay home and raise the children without worrying about having to go back to work. If this is your primary reason for buying life insurance, you may want to consider having insurance for a term equal to the number of years until your youngest child is finished with university. Example: Al and Jessica have two children, aged four and seven. They would like both children to complete a four-year degree or diploma after completing high school. They expect the children will be 22 years old at that time. Since their youngest child is four, they should have insurance for at least 18 years (22-4=18).
Match the term of your longest debt (usually a mortgage)
Insuring debt, like a mortgage, is another common reason to buy life insurance. For many people, their mortgage is the longest-term debt they will have, so it’s wise to match their insurance term to at least the term of their mortgage. For example, if you have a 25-year mortgage, you may want to consider term insurance with at least a 25-year term. Even if you plan on paying off your mortgage early, it’s good to make your initial insurance purpose match the longest mortgage term, in case your needs change. And remember, as a rule, don’t buy your mortgage insurance from your lending institution.
When do you want to retire?
When we talk to married clients, we ask them “if something were to happen to one of you, would you still want the other to retire at the age we have agreed to?” The answer is most often yes. Life insurance provides protection for the surviving spouse to keep their retirement plans on target. If you are 15 years away from retirement, you should have life insurance coverage to provide for income replacement, future savings protection, and even a possible tax bill upon the death of one partner for at least the 15-year period.
How much can you afford?
Even if your needs suggest a longer term, it’s better to have the amount of coverage you need for a shorter term than to reduce the required insurance amount to match the duration. Shorter terms will be more affordable than longer terms, and if you choose a product that is renewable or convertible, you can lengthen the term or convert the policy to permanent coverage when you can afford it. For example: Al and Jessica have determined they need $1 million life insurance for at least 18 years, but the cost won’t fit in their budget. They should consider buying the $1 million of convertible and renewable coverage for 10 years, which will be less expensive, and re-evaluate their financial position annually to see if they can convert the coverage to either a permanent policy or buy a longer term once they can afford it. It’s important to remember, however, that insurance gets more expensive the older we get, so the best solution is buying what we need early in our lives.
Lots of options
While term insurance is still frequently sold as 10 or 20-year terms, many companies are offering more flexible options. Invisor TermLife offers flexible coverage from 10 to 40 years, and several other companies offer ‘pick-a-term’ products that allow you to choose a term that is best for you. It’s even possible to buy term life insurance with much longer terms, like to the insured’s age 65 or even 100, which for most of us, is more like permanent insurance. These longer-term products may be very useful for people with complicated financial situations, or for those who prefer to lock in their coverage while they are young and healthy.
If you need help choosing an insurance product and term that is right for you, the licensed representatives at Invisor Insurance can help.