Choosing how long your life insurance policy will last can be a difficult decision. Life isn’t static, and things are constantly changing. Perhaps you’re a new parent or are close to retirement; these milestones can change your perspective on the need for life insurance.
Different life events can affect the amount of expenses and outstanding debts you leave behind. This means you’ll want to consider a longer term, shorter term, or permanent coverage to accommodate these needs. It’s important to safeguard your loved ones with as much financial protection as possible.
Term versus permanent life insurance
Term Life Insurance is coverage for a fixed term, depending on the plan this term can be for 10 years, 20 years, 25 years, or for any other period that is defined in the policy. At the end of the term period, you can either renew the policy or just allow the policy to end. If you decide down the line that you would like permanent insurance, then depending on the plan you may also be able to convert a term Insurance policy into a permanent insurance policy.
Permanent Life Insurance has continuous coverage, it lasts for your lifetime, and your beneficiaries then receive the death benefit. The premiums are based on the day you purchased the plan, which means changes in age and health through-out your life won’t cause premiums to increase. Although, permanent life insurance is more expensive than term life insurance when you first purchase it, keep in mind the rates will never fluctuate. In contrast, upon renewal term life insurance rates can increase.
To determine how much life insurance coverage you may need, start by revisiting the reasons why you want life insurance to begin with. These reasons can affect the duration of the term of your insurance policy. For instance, if you have difficulties paying off some of these expenses while you’re alive, then you may want to extend your term protection for a longer period.
Here are some typical reasons why many people need life insurance coverage:
- Cover outstanding mortgage payments
- Cover children’s post-secondary school expenses
- Cover final / funeral expenses
- Expenses such as debts, credit cards and loans
- Income replacement
You may want to use an insurance calculator to figure out the amount of coverage you will likely need to financially protect your loved ones.
Life Stages: Choosing a Life Insurance Term Length
As you move through these common life stages, here is a guide to help you determine the length of your life insurance policy. Keep in mind that actual insurance plans should always be discussed with an advisor.
If you recently got married, then you’ve added a new dependent in your life (your partner). This means you may want to protect them in the long-term by choosing a lengthier life insurance policy. A 20 or 30-year term can be appropriate options, particularly if you are younger when you get married. The advantage of a longer term is that the younger and healthier you are when you apply, the less expensive the rates are for the duration of the term.
These term lengths will financially protect your loved ones for a longer period. If the worst were to happen, the death benefit can help support your partner’s lifestyle, whether that’s to cover rent or mortgage payments, other debts such as outstanding student loans, or helping your partner build a new life.
- Can my partner afford to make our monthly mortgage/rent payments without my help?
- What other personal costs do I have that my partner may have to cover?
Now that you own a home, you also have a mortgage! A mortgage can be one of the biggest investments and debts that you owe over the course of your life. If you were to pass away before paying off the entirety, then you will leave behind a debt that your loved ones will have to cover. Consider choosing a longer term such as a 20-year term or 30-year term to provide the people closest to you with protection while you slowly pay down your mortgage.
- How long will it take to pay off my mortgage?
- Can my partner afford to make mortgage payments without my income?
It may not only be your partner who is depending on your financial support. If you have young children, then you want to ensure you leave behind enough funds to help them maintain their lifestyle. In 2017, the average household spending costs across Canada was $86,070.1 The death benefit from life insurance can also help them to pay for their post-secondary education, or other expenses while they’re growing up.
If you’re a parent with young children, you likely want to ensure your kids are protected financially. A 20-year term usually provides enough coverage until your kids have grown up and are financially independent. Before then, your children likely won’t have the financial means to care for themselves if you were to pass away.
- Can my family afford our current lifestyle without my income?
- What other expenses can come up in my children’s lives as they’re growing up?
A 10-year term could be perfect for parents who need short-term coverage specifically during the time their children are in college/university. Post-secondary school is expensive and tuition costs across Canada increase every year.2 Considering education can open more doors for your kids, this can be important to think about when it comes to financial coverage and ensuring they have the best shot at a high-quality education.
- Can my partner afford our children’s post-secondary education without my income?
If you’re nearing retirement within the next five to ten years, then a 10-year or 20-year term may be the perfect length to help protect your loved ones. Once you retire you may be using your government pension and your Registered Retirement Savings Plan (RRSP) investment for lifestyle expenses instead of your income. If you have been fortunate enough to cover large expenses such as your mortgage or children’s post-secondary education and continue to have financial security, then a 10 or 20-year term may provide the right amount of protection during this time.
- Have I paid off my large outstanding debts?
If you have retired with little to no outstanding debts and have financial security, then a 10-year term may be ideal. You and your partner may be relying on your retirement benefits for lifestyle costs. If you were to pass away you can continue to support your loved ones, and they can use the death benefit to cover their expenses.
- Do I have any outstanding debts?
- Does my partner rely on my retirement benefit?
Reasons to consider a longer length of time
There are many reasons why you should consider choosing a term that has a longer length:
When you apply for life insurance, you will be younger and are more likely to have fewer medical issues. This means you will probably pay lower premiums, and these premiums are fixed for the duration of the length of your term. However, if you were to choose a shorter term, when the term ends you need to apply for a new term. This means the insurance provider will evaluate your health again. This will lead to increased premiums.
When you have a longer life insurance term, you are protected for this time frame. This means you’ll have peace of mind knowing that your loved ones are financially protected for the duration of this term.
If you decide that you don’t need the amount of coverage you had chosen when you first purchased the policy, you have the flexibility to reduce the amount. This will cause your premiums to lower as well. For example, if you were 20 years into a 30-year policy and you were able to pay off your mortgage then depending on the plan, you can speak to your insurance provider to adjust the amount of coverage.
Is life insurance right for you?
The right life insurance plan can give you peace of mind that your loved ones will be financially protected. Deciding on the length of your life insurance term is dependent on the stage of life you’re in and any expenses or debts your family may be left with when you pass away.