When buying life insurance, most people spend more time and thought determining how much coverage to get.
But there’s another big decision to make, one that greatly affects how much premium you’ll pay.
How long of a term should you purchase?
The longer the term, the more you pay
When you buy term life insurance, your premium payment buys coverage to insure your life for a specified term. The most common terms are 10, 20 and 30 years, though some insurers offer terms in five-year increments.
The longer the term, the more you will pay in premium because the risk of death increases the longer you are covered.
If you pass away within the term of your policy, the insurance company will pay your named beneficiary(s) a death benefit.
If the term expires before your death, your coverage will terminate and you will have to decide whether to renew your life insurance. Doing so means you will have to go through underwriting and will likely have to pay a higher premium because you’ll be older and may have health conditions that present more risk to the insurance company.
Is a 30-year term always the best option?
Like with other insurance recommendations, there are multiple schools of thought on the subject of term length.
Some experts suggest always buying the longest term available, typically 30 years, to receive maximum protection. This is especially true if you’re younger and will be likely working for at least the next 30 years. This way, you’re locking in a rate based on a low age and optimal health, and will continue paying that rate as you age and the potential for health issues increases.
The flip side of that argument is that you may not necessarily need term insurance for a full 30 years. While you can always cancel a 30-year term policy after, say, 20 years, you would have paid for 30-year coverage when you could have saved money by buying 20-year coverage.
Here are a few questions to help you determine a proper term length.
How long do you plan to keep working?
The primary purpose of term life insurance is to help replace the income lost if you die unexpectedly, to provide for your family or other dependents.
Therefore, one way to determine the optimal term is looking at how long you plan to work. Once you’re no longer earning a regular income, the need for term life insurance diminishes. If you only plan to work another 20 years, there may not be a need for a 30-year term policy.
What’s your family situation?
In most situations, people buy term life insurance to provide for the needs of their family if they pass away.
Therefore, choosing the right term period means looking at your current family situation and how long they may depend on your income.
If you have a working spouse, the need may not seem as great, but keep in mind your lifestyle and expenses are likely based on both of your incomes.
Also, if you have a newborn child, your income is likely going to be needed to raise that child for at least 20 years, if not longer. Older children may not depend on you for near as long.
How much coverage can you afford now?
Once you’ve completed residency and started your practice, cost likely won’t be a concern. But if you’re still in medical school or completing your residency, you may not have the money for a 30-year term policy.
Since having some coverage is better than none, you may have to elect a 10-year policy and get more coverage once you’re established in practice.
Should I choose a shorter term now?
Chances are you may need more coverage as my income and responsibilities grow.
The downside of electing a shorter term with the intention of renewing later is that your age will make your new coverage more expensive. If you’ve incurred any health issues, that could add to the cost as well, and in rare instances you may no longer qualify for coverage due to a serious health risk.
There are several ways to lock in rates for the short-term, fulfill the need for greater coverage amounts in later years, and avoid additional underwriting.
Guaranteed Purchase Options
One way is to buy a guaranteed purchase option (GPO) rider, sometimes referred to as a guaranteed insurability (GI) rider.
This rider enables you to increase the amount of your coverage without having to go through the underwriting process. There may be limits on how you use this option, such as the amount of death benefit you can add and when you can increase coverage.
Annual Renewable Term
Another possible option is to purchase annual renewable term (ART). This is a type of short-term policy where you have coverage for one year, with the option of renewing the policy annually.
ART is similar to level term insurance with one key difference:
Whereas level term charges the same premium amount for the full length of the term period, ART premiums will increase over time.
Though you have to renew ART coverage each year, contracts guarantee you a period of insurability. The premiums for ART policy start out lower than comparable level term policies. This makes them an attractive option for short-term insurance needs. Each year you renew, the premium will increase while the death benefit amount stays the same.
Another way to increase your coverage as circumstances change is through laddering, which is owning two or more separate life insurance policies.
For example, say you are a resident or new physician with a spouse, but no children. You purchase a $600,000, 30-year term policy to provide for your spouse in the event you pass away. Later, you purchase a home. To help ensure your surviving spouse can pay off the mortgage, you add a $400,000 20-year policy to your previous policy. Once you have children, you may want to add another policy to ensure they can be cared for.
For more on life insurance, keep reading with:
The Ultimate Guide to Physician Life Insurance in 2019