Deciding on the length of your term life insurance is one of the more daunting parts of the entire application process. Many people think that 10-year term life insurance is too short, though there are plenty of reasons why one would buy it (check out our post about it here). According to Forbes, 20-year term life insurance is the most popular, but people who buy life insurance at young ages often opt for 30 years. So which is best for you?
Defining Term Life Insurance
Before we dive into the question of which term length is best for you, let’s take a step back and define term life insurance. Term life insurance, as opposed to permanent, is a type of life insurance that is only valid for a specific number of years, or term. Terms are usually sold in increments of 5 or 10, and the most common are 10, 15, 20, 25, and 30-year policies. Permanent life insurance, on the other hand, has no expiration date.
When you buy term life insurance, you are covered for the period of your term as long as you pay the monthly premiums. (Another prerequisite for coverage is filling out the application honestly — if you conceal information or aren’t 100% accurate, the insurance company can dispute the death benefit payout.)
Once the term is over, your coverage ends. The purpose of term life insurance is to offer financial coverage to your chosen beneficiary should you die during that time period. You get to choose the coverage amount, and it can range from tens of thousands to millions of dollars. The death benefit, if ever claimed, is paid out tax-free and can be used by the beneficiary for any purpose.
The length of your term and the amount of coverage are based on highly personal factors, which is why there is no one-size-fits-all solution when it comes to life insurance.
Is 20 or 30 Year Term Life Insurance Best for You?
To determine whether you should buy 20 or 30 year life insurance, you should examine the reason why you’re getting it to begin with. Most people get term life insurance to cover their loved ones up to a certain point or milestone.
Popular milestones include:
- When your youngest child finishes college
- When your youngest gets married
- Paying off your mortgage or other debts
The age that you decide to buy life insurance and the milestone you want to get to will determine the length of your term. For example, if you’re 30 years old and have 2 young children, you might say to yourself that you want to make sure they can pay for college no matter what. In this case, you need to do some simple math. If your youngest is 3 years old and will graduate college at the age of 21, subtract 3 from 21 and you’re left with 18. Since most term policies are sold in increments of 5, you would buy 20-year life insurance. There are certain companies that do offer odd length policies, so purchasing an 18 year term is technically possible.
Let’s take the same situation with a different milestone. If you’re 30 and have 2 young children, you want to make sure you pay off your 30-year mortgage so the debt doesn’t pass on to them. In this case, you would buy 30-year term life insurance to ensure that, should the worst happen to you, your debt won’t pass onto your loved ones.
No Exam Term Life Insurance
Another type of term life insurance is no exam, an alternative type of policy that allows you to get coverage without undergoing a medical exam. Traditional term policies require applicants to undergo a medical exam. The results are sent to insurance underwriters, who determine the applicant’s statistical probability of dying early. If the probability is low, the insurer considers him low-risk and offers lower premiums. If the probability is high, the applicant is considered high-risk and his premiums increase.
With no exam life insurance, you can skip the medical exam and go straight to the coverage. No exam term life insurance is also known as simplified issue, since the application process is simplified by eliminating the need for an exam.
The downside of this type of insurance is that premiums tend to be higher across the board. Since insurance underwriters are unable to perform a statistical analysis, every applicant is treated as high-risk.
Simplified issue also offers policies of 20 and 30 years (and others), and the same method that you use to determine the length of your term for traditional life insurance can be used to determine the length of your no exam policy.
For the healthiest of clients, it is also possible to obtain a regular life insurance policy on an accelerated or no exam basis. These policies are exactly the same as if you would have taken an exam both with regard to pricing and features. However, your health and finances must be stellar in order to qualify.
Why Is It So Important to Calculate the Term Correctly?
If you’re debating between 20 and 30 year life insurance, you might say, why not err on the side of caution and just get the 30-year policy so you’re safe? While this opinion is certainly valid, the problem with getting too much life insurance is that you have to pay for it. There is a significant difference in price for a 20-year policy and a 30-year policy.
Here are sample rates for California-based male and female non-smokers in good health for a $500,000 term policy.
As you can see, the rates of a 20-year policy are significantly lower than those of a 30-year policy. That’s why calculating the right term length is so important. If it’s too short, it won’t do the job it’s supposed to. If it’s too long, you can end up paying a lot more money every month, perhaps more than you can afford.
If you need help deciding whether 20 or 30 year term life insurance is a better option for you, contact the insurance advisors at Sproutt for advice.
(You’ll also note that women pay less than men across the board. This is because women live longer than men, statistically. Similarly, smokers can expect to pay more than non-smokers because smokers have a high rate of mortality, statistically.)
Still have questions? We’ve got answers.
How do I know if I need 20 year term life insurance or 30 year?
To figure out how much life insurance you need, you have to know why you need it. Most people choose the length of their term based on when they will hit certain milestones. Sometimes the milestone is yours — like paying off your mortgage or reaching retirement. In other cases, the milestone refers to others — when your youngest child finishes college or gets married. So before deciding what term life insurance to buy, first, decide on the milestone you need to reach in order to feel comfortable living without life insurance. Then, calculate how many years it will take to reach that milestone.
Why should I choose term life insurance instead of permanent?
The main reason people choose term over permanent is because it’s much more affordable. Permanent life insurance lasts your entire lifetime, which is good because you don’t need to decide on milestones or calculate terms. But the downside is that it’s quite costly, and that’s why term is more popular.
Do I need to undergo a medical exam to get 20 or 30 year life insurance?
Traditional term life insurance requires you to undergo a medical exam to get an accurate quote. There are, however, no exam life insurance policies that allow you to skip the exam. No exam life insurance comes in policies of 20 and 30 years (and others), but depending on your age and health, it may be more expensive than traditional term life insurance.
How Much Can I Expect to Pay for 20 or 30 Year Term Life Insurance?
The question of cost doesn’t have a straightforward answer since there are so many factors that go into determining each policy’s monthly premiums. As mentioned above, health is one of them — that’s why traditional policies require a medical exam. But there are many other factors that insurers take into account. According to Farm Bureau Financial Services, these include:
- Family health history
- Prescription records
- Driving records
- Smoking status
- Amount of coverage
Since insurers consider so many factors, two people who seem very similar on the surface can end up getting very different rates. The best way to find out how much you can expect to pay in monthly premiums is to get a free quote.