Should You Get a Higher Coverage or a Longer Term?
Updated: Oct 10
When purchasing term life insurance, there are two main decisions to make. How much coverage do you want, and how long do you want the policy to last? While your choice in each of these matters may impact your policy's premiums, it could be wiser to focus on your particular situation than premiums when making these decisions.
Sproutt's advisors may help determine what policy is right for you, but it's a good idea to have some knowledge of your options. Read on to learn about some factors to consider when choosing a life insurance policy.
Coverage, Duration and Premiums
How a policy's coverage and duration may affect premiums is quite straightforward and simple.
As a policy's coverage amount and/or effective period are increased, the insurance company's risk may likewise be increased. Premiums can be raised to account for the extra risk that the insurer may take on.
The inverse is also true. When the coverage amount is lower and/or the effective period is shorter, premiums can drop. The insurance company may not be exposed to as much risk, so they may not have to charge as much.
Look at Your Personal SituationWhile these correlations sometimes lead people to play with coverage and duration options in order to find the "best deal", this may not be the best method to shop for life insurance. A good deal is not the one that'll give you the coverage you need and may not require you to pay for unnecessary protection.
Select the Right Coverage and DurationTo determine what you need, consider how much coverage you should have as well as how long you'll need coverage.
When selecting the amount of coverage to purchase, there are a few common guidelines to consider. You might purchase:
10 times your income, which may generate enough interest to replace your income
10 times your income plus $100,000 per child, which can help pay for college
10 times your living expenses plus any outstanding debts, which may allow your beneficiaries to pay off loans (Make sure you consider the cost of your mortgage when calculating total debts).
When determining how long to have a policy last, determine what you're purchasing coverage for. There are a few common scenarios. You may want a policy that lasts until:
You reach retirement age
Your children are grown and graduated from school/college
Your savings reach a specific amount and can provide protection for your spouse
Your mortgage is paid off
Term life policies last for a defined number of years, usually in increments of 5 years. You may be able to find one that provides coverage for as long as you need it and not much longer.
In specific situations, such as if you care for a disabled loved one, you might need a policy that will last your whole life. Whole life policies are designed to provide coverage for as long as you live, and may therefore be preferable to term policies in these situations.
Choosing Between Coverage and DurationWhile many would like to have high coverage for a long duration, sometimes budgets may not allow policyholders to purchase all the coverage they want for as long as they would like it. Should you have to choose between maximum coverage amount and policy duration, it may be wiser to favor coverage over the duration.
You'll often find that policies with high coverage and shorter duration may offer more protection at a lower price than those with low coverage and long duration, giving high coverage policies the better general overall value. Additionally, making sure you have the coverage you need at the present moment may keep you from being underinsured. When you need to renew your policy or purchase a new one, you may be able to do so in the future, as your available budget may increase later in life.