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How Long Do I Need Life Insurance For?
The length of time for which you need life insurance is an age-old question. Five, 10, or maybe even 15 years? Longer? How about 25 or 30 years? What about if you just went ahead and got it for your entire life? There are plenty of options on the table when it comes to choosing policy length, but which one is best for you? Here, we're looking at life insurance length and how long you should get it for.
Term v perm
There are two primary types of life insurance: term and permanent. One gives you life insurance for a set amount of time while the other lasts for your entire life. Term coverage is temporary and has a reputation for being inexpensive. Perm policies, on the other hand, are more costly, but they never expire.
When you might need a term life insurance policy
Term policies are the more well-known of the two, mainly because they're cheaper, but there's also a stereotype here in the US that life insurance is only for a set amount of time. That's certainly true with a term policy–you pick how long your life insurance lasts by choosing a length that suits you.
Options available include pretty much anything between five and 30 years, though it's possible to go up to 40 depending on your age when taking out the policy. Term life insurance is particularly popular with new parents, who get it to protect their new family.
Other people who implement term coverage tend to include homeowners. They use the policy as a safety net should the worst happen to them while they still have an outstanding mortgage to pay.
The length of time you get with a term policy depends on individual needs. Someone may decide 10 years is good enough because they have a 10-year business loan where the lender requires life insurance.
Others may decide that a 20-year term is more suitable for their needs. Perhaps they're young parents who want to protect their children until they reach adult age, at which point they don't feel a policy is as necessary.
Are they any drawbacks to term coverage?
On paper, term coverage can look like a good idea, especially if you only think you'll get a policy for a limited amount of time. And while term options are cheaper than alternatives, there are a couple of drawbacks–and they're pretty major ones, too.
A term policy offers a death benefit while you're insured, paying out to your beneficiaries if you die. But that's all it gives you, and once it's finished, that's it. If you survive the whole term (which is obviously the main goal), your premiums don't offer any returns.
If you wanted to renew the term policy, you would also be charged premiums at the age of renewal. That means you're likely to pay more for a new policy. Let's say you got your first term coverage in your 30s. If that policy lasts 30 years, you'd be 60 when it expires. But if you wanted to renew, you'd be charged as a 60-year-old–and the older you are, the higher your premiums.
When viewed through the prism of only getting a death benefit and higher renewal fees, the initial lower price for a term policy doesn't look quite as appealing. You don't really gain anything (unless you die, as twisted as that sounds) and could spend thousands without seeing any returns.
Therefore, the idea of fixed-term life insurance suddenly doesn't look like the smartest move, with something a little more permanent suddenly looking like a handy alternative option. More below.
Life insurance for life
Unlike a term policy, permanent life insurance doesn't expire. That means you pay higher premiums, but for a good reason. As well as a death benefit, a perm policy allows you to build wealth while you're still alive.
The wealth-building aspect of life insurance changes the entire dynamic. It essentially becomes a form of investment where you can accrue money through its cash-value element. With the cash value, you can increase your wealth and withdraw the money saved while you’re still alive.
If you’re paying into a permanent life insurance policy from the ages of 25 to 65, that’s 40 years of wealth building. Even better, permanent life insurance policies tend to grow at an annual rate of between 6%-8%, so you can really hike up the amount of money saved.
A perm policy works by paying into two premiums: the death benefit and cash value. Both of these grow over time, allowing you to build wealth and grow your money to leave to one of your loved ones.
Not only does a permanent life insurance policy let you build wealth–you can do so tax-free. When it comes to withdrawing the cash value, you have the option of doing it with a 0% loan to yourself. Of course, you can't owe yourself tax, which means the cash value is free of any taxes. When you do pass away, the death benefit pays off the loan, with the rest going to your beneficiary. It's a modern way to build tax-free savings and can save you a fair few dollars with the IRS.
While the premiums on permanent life insurance are more expensive, they never increase. That means you’re paying the same at 25 as you would 55. And with the average American living longer, you could potentially enjoy the same premiums for a significant amount of time.
You can also add riders to your life insurance policy, giving you access to benefits like long-term care and accelerated death benefits if you fall ill and are unable to work due to your condition.
How long do you need life insurance for?
Ahh, yes–that age-old question. It really does come down to your personal circumstances, but a permanent life insurance policy looks like the best option on paper. Once you factor in the ability to build wealth and keep the same premium, it’s fair to say that it offers more than term coverage.
Some people might decide a 10-year policy is right for them; others may opt for 20 years. But choosing a permanent policy lets you build wealth during those same terms (10, 20, 30 years, or however long you decide to keep it), which can set you and your family up for the future.
In conclusion: The right life insurance length for you
A life insurance length can vary, but with a permanent policy, you're getting value for money with the wealth-building element through the cash value. Factor in the fixed premiums and handy riders, and the answer to 'how long do you need a life insurance policy for?' looks like it could just be forever.