15 March 2012 0 Comments

Should You Buy a 10, 15, 20, or 30-Year Term?

So far, I’ve talked about the cost of Term Life Insurance and how much is needed. But in reality, that only accounts for half of the decision.

Once you’ve figured out how much Term Life Insurance you need, the next step is choosing a term duration that makes the most sense for you. If you’re a breadwinner with very young children – and you plan on having more children – then a 30-year term would make sense for your needs. If the premium for a 30-year term is beyond your budget, don’t reduce your policy amount. Instead, shorten the term duration – all the way down to 10 years, if necessary. As time goes by, your income is apt to increase – at which point you can reapply for a policy with a longer duration. Just don’t sacrifice adequate coverage today when your family is in the greatest need of replacing your income.

Another solution is to purchase term coverage for different durations of time. At least one insurance company with competitive term premiums offers riders that can be attached to a term policy. So for example, you could purchase a $200,000 30-year policy and add a $200,000 20-year term rider plus a $600,000 10-year term rider for $1,000,000 of total coverage. This way, you can tailor your coverage to meet your needs and save $120 a year over the cost of purchasing three stand-alone policies.

Before I wrap this up, I want to point out that until now, we’ve only been looking at level Term Life Insurance – i.e., a policy whose death benefit remains level. No increase, no decrease. With decreasing Term Life Insurance, the death benefit decreases each year for the duration of the policy. The decrease could be a level, uniform decrease, or it could be tied to a mortgage amortization schedule.

I don’t recommend decreasing Term Life policies. Typically, the premium per thousand of death benefit is not as competitive as that of level Term Life Insurance. Moreover, most people find that their need for protection does not necessarily decrease in proportion to the structured decrease in the policy. You may purchase a decreasing Term Life policy to pay off your mortgage, but what happens if you buy a new home with a higher mortgage – or refinance your home with a higher indebtedness? Better to buy a level Term Life policy. If you want to decrease the death benefit later on, you can do so – and you’ll be able to control the rate of decrease yourself.

Coming Up Next: Life Insurance from a Lending Institution and Employer-Provided Life Insurance 

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