Terms of Life Insurance

Frank wants to buy a term life policy. What do the different terms mean, and why is a 10-year term cheaper?

QUESTION: Frank on Facebook wants to buy a term life policy. What do the different terms mean, and why is a 10-year term cheaper?

ANSWER: It’s cheaper than a longer term policy because they are guaranteeing that the premium is not going to go up. In some cases you are buying a level term that doesn’t have a guarantee, but the marketplace pretty much guarantees that they are not going to go up because you jumped policies.

When you buy level term insurance—which is what you want—if you buy a 10-year policy, your premium is the same, or level, for 10 years. It is guaranteed to be the same. A 15-year policy would be for 15 years and so on. If someone is going to guarantee you a premium for 30 years, then at the end of those 30 years you are much more likely to die than you were at the beginning of the 30 years, statistically speaking.

Obviously, a 30-year guarantee would be giving you insurance over 30 years instead of 15 years, so it would be more expensive per month.

I generally recommend 15-year or 20-year level term life insurance depending on how long you are going to need it. The way you determine that is to look at when you are going to be out of debt, when the kids are going to be grown and gone, and when are you going to have enough money to cover your spouse should something happen to you.

Let’s say you are 32 and have three kids ages 5, 6 and 8. In 20 years they should be gone from home. In 20 years your house would be paid off and you’d be debt-free if you are listening to me and doing what I teach because you would never take out more than a 15-year mortgage, and of course, in Baby Step 2 you are going to work off your debts.

And of course, you are going to be investing 15% of your income through a large portion of that time or more, so you’ll have pretty serious money set aside to retire on. Let’s say you have $700,000 in mutual funds and the kids are grown and gone when you are 52, and you are completely debt-free. If you die, your wife has $700,000 in the bank and you have no debt and no kids at home. In that scenario, your 20-year level term was enough. You didn’t need more term insurance over a longer period of time than that.

Now, let’s say you are 25 and you have one kid but want to have three or four more over the next five or seven years, then you might look at a 30-year because it may be 30 years before the kids are grown and gone and you accomplish these goals.

Let’s say you’re 52 and the kids are gone, or there is one left at home but will be gone shortly, and you’ve got a couple hundred thousand saved in your 401(k), and you have four or five more years to pay on debts. You may need term insurance to represent 10 years because by 62 you’d be debt-free and really have some money saved and the kids will be gone. You probably don’t need a 15-year policy then.

So the question to ask is how long you are going to need the insurance. But generally speaking, 15-year or 20-year will cover most of you. My personal experience has been that if you don’t get hurt or have some kind of health problem, then you’ll probably buy more term insurance as you go along.

Here’s what’s weird: About 10 years after I bought my first term insurance, I bought more term insurance cheaper, but I was 10 years older. It wasn’t priced higher because term insurance has become so competitive in the marketplace that the price has gone down.

Go to zanderinsurance.com and get a policy that is worth 10 to 12 times your income.