Q. I’m going to be purchasing term life insurance soon. How long should the policy be in effect? Term insurance can be as long as thirty years. How do I know which one is correct for me?
First, it’s a great decision to purchase term insurance instead of expensive policies that combine insurance and investing. I’m a big advocate of keeping the two separate for the vast majority of situations.
Regarding the length of the term for your policy, try to match the insurance policy to the amount of time your income would need to be replaced should you die prematurely. For example, if you have very young children, a policy of 20 to 25 years would be appropriate. After that period, your children should be on their own and your debts should be eliminated. Your regular investing over the decades should have grown enough to provide for your spouse or heirs should you die after the policy expires.
On the other hand, suppose your children are already grown and on their own, and you are in your mid-50’s. You plan to retire at 65 when your mortgage will be paid off. A term policy of only ten years may be sufficient. By then, your debts would be eliminated and you would have begun retirement (with pensions, Social Security, and investments providing the needed income).
When in doubt, go a little longer on the policy as term life insurance is relatively cheap. It works great as an income replacement tool while it’s needed. Hopefully you are investing regularly, as well as eliminating any outstanding debts and mortgages, so that eventually you no longer need the policy.
John is a CPA and personal finance coach. Email your questions to firstname.lastname@example.org.
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