How Long of a Term Should You Choose When Purchasing Life Insurance

The most obvious answer to this question is to purchase a term insurance policy with a duration only as long as you need.

But, there are other considerations to take into account. A person might not able to afford exactly what he needs. Or, a person’s needs might not exactly match policies available in the marketplace, so he would end up buying either more or less than he needs.

Needs can also change over time, and term insurance ladders (multiple policies with different term lengths) are a common solution to this.

Needs are also based on what you know an expect today. Perhaps you think they will go down in the future. Or perhaps you think they will go up.

Regardless, it is important to choose and appropriate term length for your insurance policy. (You’ll also need to determine how large of a death benefit you need: How Much Life Insurance Coverage Do You Need?, Life Insurance for Income Replacement: Part 1, and Life Insurance for Income Replacement: Part 2 are good articles to check out).

In this article we will go over how premiums change for some common term lengths: 10, 15, 20, and 30 years.

To keep things simple, we will only look at a handful of selected ages and two health classes (very healthy people and smokers) for both men and women.

Healthy Men

For healthy men, the cost for a policy with a longer term does not rise that quickly for a wide range of ages with terms up to 20 years. Even for 55-year-olds, the costs do not rise substantially until a 30 year term is selected.

Male Smokers

Male smokers look similar except that the premiums are a bit more spread out between ages and the increases between term lengths are steeper.

Healthy Women

This graph looks similar to the men, except shifted down and a little flatter.

Female Smokers

The trends here are similar to male smokers.

Premium Increases vs. Term Length Increases

It is useful to look at the percentage increase in premium when the term length is increased. We can compare it to a proportional change. For example, if the term goes from 10 years to 15 years, that is a 50% increase. We can see how the premium increase compares to this.

A reason that you might want to look at this is to see where you get the best value.

Here is the data for healthy men:

Age 10 Years to 15 Years (50% Increase)
15 Years to 20 Years (33% Increase)
20 Years to 30 Years (50% Increase)
10 Years to 20 Years (100% Increase)
35
14% 12% 37% 28%
40 18% 15% 42% 35%
45
19% 18% 45% 41%
50
23% 23% 60% 51%
55 26% 31% 116% 64%

In all cases except for two, the premium increase is smaller than the term length increase, which is good. When going from 10 to 15 years it is substantially less, and even going from 15 to 20 years is quite a bit less.

When going from 20 to 30 years, it gets closer. So, based on this simple analysis it would appear that a 20-year term is generally the best deal for a healthy man.

This is highlighted in the last column. You are doubling the length of coverage, but the premium does not come close to doubling.

One instance where a 30 year term could make sense is if you plan to have children over a number of years. It could also be used for a mortgage, but eventually you would be over insured as your mortgage balance declines.

Here is the same table for male smokers:

Age 10 Years to 15 Years (50% Increase)
15 Years to 20 Years (33% Increase)
20 Years to 30 Years (50% Increase)
10 Years to 20 Years (100% Increase)
35
18% 17% 46% 38%
40 20% 22% 50% 47%
45
23% 28% 54% 58%
50
24% 26% 33% 56%
55 25% 22% NA 53%

Even for smokers, increasing the length of the term generally results in a premium increase that is smaller than the term length increase.

Again, you can see that going from 10 to 20 years for a smoker is still generally a pretty good value.

Here is the table for healthy women:

Age 10 Years to 15 Years (50% Increase)
15 Years to 20 Years (33% Increase)
20 Years to 30 Years (50% Increase)
10 Years to 20 Years (100% Increase)
35
4% 6% 52% 11%
40 7% 9% 51% 17%
45
13% 13% 42% 28%
50
16% 18% 61% 38%
55 20% 27% 90% 52%

They are like the healthy mean, except their premiums go up even less. A 15 year term for a young woman is barely more expensive than a 10 year term.

Even going from 10 years to 20 years for a young woman is a very modest increase.

The value is still OK, but begins to diminish when going from 20 years to 30 years.

Here is the table for female smokers:

Age 10 Years to 15 Years (50% Increase)
15 Years to 20 Years (33% Increase)
20 Years to 30 Years (50% Increase)
10 Years to 20 Years (100% Increase)
35
15% 13% 34% 30%
40 17% 16% 38% 35%
45
17% 21% 42% 42%
50
17% 22% 61% 43%
55 17% 23% NA 44%

Female smoker patterns are similar to males, except the values are smaller (which is good).

For all of the percentages, even if they are sometimes high, the dollar amount difference in premium could be low depending on the size of the initial premium.

I won’t go into the mechanics of calculating life insurance premiums here, but if you are interested in an in-depth discussion, read How Life Insurance Premiums Are Determined.

Conclusion

If you are unsure or think that your needs could increase in the future, it is generally very cost effective to add some more years to a term.

Going from 10 years to 15 or even 20 years is often economical. After you go past 20 years, the costs start to rise more rapidly.

There are cases where a longer term such as 30 years is beneficial. Just be sure that you’ll need the coverage since it will cost more.

So, right around 20 years is a sweet spot in many cases.

On the other hand, if you know you don’t need the additional coverage, don’t buy more insurance just because it’s inexpensive.

We only went over 10, 15, 20, and 30 year term policies in this article, but there are other terms lengths available.

Every situation is going to be different. If you have questions about your situation, please feel free to contact us.

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