Before we even get into how to choose which term life insurance policy fits best, we should cover why you’d choose a term policy in the first place. Many financial planners say that term life insurance policies are the best option for most people. In fact, they default to term life insurance unless the person they’re advising is in a specific situation with a bigger portfolio.
First, let’s go over the main types of life insurance and what the differences are.
Term Life vs Whole Life Insurance
A whole life insurance policy requires the policyholder to pay a premium for the rest of their life. The payout your beneficiaries get is guaranteed when you pass away. Since these policies pay out more often, the premiums can be much higher. Why did we say they pay out more often and not always? If your circumstances ever change and you’re unable to pay your monthly premium, your policy is no longer valid and won’t pay out to your beneficiaries.
Term life insurance, on the other hand, acts more like how you might expect insurance to. When you get car insurance, you’re paying to protect yourself from a specific problem: cars are expensive to replace and medical bills are even worse. But everyone who pays their car insurance premium isn’t guaranteed to get their money back, right? It only pays out when you need it. The same is true for term life insurance. Since you’re not guaranteed a payout with term life insurance — you can live happily for the next 10, 15, 20 years — you get to pay a much smaller amount in premiums.
Choosing a Policy Length
Think about how your loved ones would pay for things if you passed away. The first costs are often for a funeral service, but it goes so far beyond that. If you shared a mortgage or rent with your partner, they’re likely going to struggle without your income. That’s true whether you’re dating or if you’ve been married for 10 years. If there are kids in the mix, they may have lost their primary caregiver.
So, term life insurance is meant to protect you during those times in life when your loved ones need it most. If you were to pass away today, who would be left struggling financially? This can include:
- Your child, whether they’re a minor or an adult
- Whoever will be responsible for your funeral
- Your spouse or partner
- Your parents, who might need help as they age
- Anyone who has co-signed loans for you
- A sibling you help pay for school
- Your business partner
When considering a term length for your policy, you just need to think about who you’d like to protect. Common term lengths are 10, 15 and 20 years.
For families with children, they often want to make sure that they have coverage to the point where their kids can be financially independent. Remember that even if you weren’t planning to help them pay for college, you may still have wanted to co-sign student loans for them. If you’re not around for that, you might want to extend the length of the policy to cover those extra few years.
Many people have built a life together with a partner or spouse and want to protect them from having their life completely upended. If you have a mortgage, think about how many years are left on it. Couples will sometimes plan to have a term life insurance policy that ends around the time when they tap into their retirement savings.
If you’ve gone into business with someone, think about how they’d be able to manage it alone.
Choosing the Right Amount of Coverage
Now that you know who you’re protecting with this life insurance policy, you can think about how to choose the amount of coverage. A quick calculation is to take the term of the policy — let’s say 10 years — and multiply that by your annual salary. That gives you an idea of what you might need to replace if you’re not around to support your loved ones. Remember, you can list multiple beneficiaries for your policy as well. That way, you can continue to support the different people who may need it.
If your loved ones relied on certain benefits through your job, such as health insurance, you’ll want to make sure to add that in. A fee-only financial advisor can help if you have any questions.