Term life insurance is a good fit for most people because it is simpler to understand and more affordable than permanent life insurance.

When buying a term life policy, there are two important decisions to make. The amount of financial protection your family needs and the duration for which they need it.

So, the right coverage length depends on your obligations. Let's cover this in more detail in today's post.

How long should my life insurance term be?

Your term life insurance policy should last until your final major financial obligation is taken care of. 

Let’s say you want to take out a term life plan to cover three financial obligations: 

1. A Mortgage – You will pay down your mortgage within the next 20 years. 
2. The years until your children become financially independent - You estimate that this will take around 22 years.
3. The number of years until retirement – You have another 30 years to go before you retire. 

In this case, a policy with a 30-year term would work best for you. It matches your longest financial obligation, which is to make sure your family receives adequate financial help should you pass before retirement. 

What is a term length for life insurance?

The term length of a term life policy states the period for which the policy will stay in force. This period can be as short as one or five years or it can be as long as 10, 20, 30, or 35 years. 

The insurance company pays the death benefit only if a claim is filed during the policy term. If you outlive your term life insurance plan, you will lose coverage, unless you renew it or convert to permanent life insurance.  

Term life vs. Whole life insurance

Term life and whole life insurance are the two of the most common types of life insurance policies. While both help you secure your family’s financial future, they have several key differences. 

Common term length options and who they benefit

You should hold on to your term life policy as long as you have people in your life who depend on your income or will inherit your debts. 

The following term lengths are most common: 

• Annual renewable term life insurance: It provides coverage that you can renew every year without taking another medical exam. At each policy renewal, your premium goes up. Consider it if you have short-term financial obligations or want protection until you become eligible for a more reasonably priced policy. 
• 5-year term life insurance: You may also consider a 5-year term life plan for obligations like a small business loan or a student loan.
• 10-year term life insurance: It can be a good fit for older people who want to cover the last leg of their employment. 
• 20-year term life insurance: Twenty years is the most popular coverage length and often an ideal choice for newlyweds, parents, and primary breadwinners. 
• 30-year term life policy: If your children are very young or you have long-term financial obligations, a policy lasting 30 years can be a great choice. Young professionals who want a policy that provides coverage until retirement may want to go with the 30-year term length. 

How does term length affect your cost?

The term length directly impacts your monthly premiums. The longer your term length, the higher the premiums, all other things being equal. 

Wondering why that is? 

The answer is simple: The longer the term length for which you are covered, the greater the risk assumed by the insurer. To put it differently, a policy with a 20-year term has a higher likelihood of the insurer having to pay the death benefit compared to a policy with a 5-year term. 

Factors to consider when choosing the best option for you

Several factors go into picking the right coverage length, such as your personal situation, financial obligations and goals, age of your dependents, and budget. You want the coverage to be long enough to cover all your financial commitments, but not so much that you end up paying premiums after they are fulfilled.

For example, for someone looking to cover a 20-year mortgage as their longest obligation, buying a 30-year term life insurance policy may not make sense.

Conclusion

Term life insurance provides coverage for a set period. This period, which typically is one, five, 10, 15, 20, or 30 years, is referred to as the term length. The right term length for you depends on the duration for which your loved ones need financial support. Longer term lengths are better for young parents, primary breadwinners, and those with major debt.

Shorter term lengths, in contrast, are a good choice for older applicants and people who need to cover a short-term financial obligation. 

Want to learn more about which life insurance company is right for you? Reach out to a Dundas Life licensed advisor today!

Frequently Asked Questions

Until what age is it best to have term life insurance?

How long your term life insurance should last depends on your financial needs and personal situation. If the primary purpose for buying coverage is to cover the mortgage payments over the next 18 years, consider the 20-year term length. On the other hand, if you are a new parent and need a policy till your kid starts earning, a 25-year term life policy might be a better choice. 

What happens when your term life policy expires?

When your term life plan option reaches its end date, you may have the following options:

1. Let the coverage end: Your insurance coverage automatically terminates the moment your policy completes its term. This means if you were to die, your beneficiary would not receive a payout. If you have fulfilled all the financial obligations for which you took the policy, you can safely let the coverage go.  
2. Renew the policy: Do you still have financial obligations that you want to cover? If so, you can renew the policy for another term. Generally, you won’t have to undergo a new medical test to renew coverage, but your new premium rate will be considerably higher.
3. Convert the plan into permanent life insurance: As life changes, your life insurance needs may change too. If the term life insurance you bought earlier is no longer adequate and you would rather have a policy that guarantees a payout no matter when you pass, switching to permanent life insurance is an option. Doing so might be cheaper than buying a new permanent plan. Plus you won’t have to undergo a medical exam either. 

Do I get my money back at the end of the life insurance term?

Term life insurance provides only a death benefit. Unlike a whole life plan, it doesn’t accumulate cash value. This means you won’t get anything back when you cancel a term life plan or when its term ends. Having said that, there’s a sub-class of term life plans called return of premium (ROP) life insurance, which refunds all the premiums paid into the policy if you outlive the policy term.

However, ROP plans are two to three times costlier than regular term life plans, so essentially you could save more by buying a regular policy and investing the extra money you would pay for a comparable ROP plan. 

Can I adjust the term length of my life insurance policy during the coverage period?

In most cases, you cannot change the length of your policy term after the contract starts. 

Can I convert my term life insurance policy into a permanent policy in Canada?

Yes, you can. Most life insurers in Canada (if not all) include the conversion option or clause in their term life plans. The conversion clause states that if the policyholder wants to convert to permanent life insurance within a certain period, the insurer cannot ask the insurer to undergo a new medical test.

Keep in mind that your cost of insurance will still go up because permanent life insurance is more expensive than term life.