What is Term Life Insurance? Term life insurance is a category of life insurance that includes policies that last for different amounts of time, known as terms. The more popular term lengths include 10, 15, 20, 25, and 30 years, but some carriers even offer policies of 5 years and 40 years. The way it works is that you purchase a policy, and then pay monthly premiums to the insurance carrier. In return for the premiums you pay, you receive a guarantee that if you die during the policys term, the insurer will pay out a death benefit to your beneficiaries. The death benefit can be paid out in a lump sum or installments and is usually not counted as taxable income. When people are deciding what kind of life insurance to buy, the first level of comparison is term versus permanent. Permanent life insurance is the other main category of life insurance, and it differs from term in two main ways:
Investment component: In addition to a death benefit, permanent life insurance comes with an investment component that allows you to accumulate a cash value that can be used during your lifetime.
No expiration date: Permanent life insurance lasts your entire lifetime. Due to the nature of permanent life insurance, it tends to be significantly more expensive than term life insurance. For this reason alone, many people choose term. Once they decide that term is the best option for them, they move on to the next decision: how long of a term should they buy? The question of term length is highly personal and depends on your financial and family situation. Most people buy term life insurance to provide financial protection to their loved ones until a certain point, such as their youngest childs college graduation or wedding, paying off their mortgage, reaching retirement age, etc. They figure out how many years it will take to reach that milestone and then purchase a term policy accordingly.
Applying for Term Life Insurance To buy a term life insurance policy, you must complete a life insurance application, which includes basic personal information as well as detailed questions about your health. Traditional term policies require applicants to undergo a medical exam as part of the application process. (As opposed to no exam policies, which dont require a medical exam. You can read more about no exam life insurance further on). The purpose of the life insurance medical exam is to assess your health and determine if you should be approved for coverage, and if so, how much should you be charged in monthly premiums. The general rule of thumb is that the healthier you are, the lower your premiums will be. Life insurance underwriters use the information from your medical exam (as well as the information you provide on your application and data they cull from third-party sources) to determine how healthy you are and your statistical life expectancy. From that point, they calculate your monthly premiums. When a term policy expires, you have several options:
Renew the policy: Many (but not all) term policies offer the option of renewal, which means you can skip the medical exam and get the same coverage you had previously. The main drawback is that your premiums will be recalculated based on your current age, which means they will be higher.
Convert it to a permanent policy: Some term policies come with the option to convert to a permanent policy. This option may be ideal for someone who purchased a short-term policy at a young age, when they couldnt afford a permanent policy. By the time the term policy expires, they may be in a better financial position and be able to afford a permanent policy. The main benefit of converting a policy is that you dont need to go through the whole underwriting process againyou can even skip the medical exam. (But like renewing, youll be charged higher rates based on your current age).
Allow the policy to lapse: When your term comes to an end, you may choose not to renew or convert the policy. This is also a valid option. Since most people buy term life insurance to get them past a certain point, they may not need to renew it if theyve already reached that point. When it comes to deciding what to do when your term policy ends, there is no right or wrong answer. There is only one question that needs to guide your decision: which option is best for YOU?
What is a 20-Year Term Life Insurance Policy? A 20-year term life insurance policy is exactly what it sounds like: a term policy that lasts 20 years. Like other term policies, 20-year life insurance has level premiums and a guaranteed death benefit. The death benefit will be paid out to your listed beneficiaries provided that two conditions are met:
You pay the monthly premiums
You provided accurate information on the life insurance application If either of the above conditions is not met, the insurer may have the right to contest the death benefit.
Advantages of a 20-Year Term Policy
A major benefit of term life insurance is peace of mind for those who have financial dependents, including spouses, partners, children, parents, siblings, and others. It allows you to plan for the future and not have to worry that your loved ones wont be protected in case something happens to you.
While whole insurance, the most popular type of permanent life insurance, also offers peace of mind, the cost is much higher. Term life insurance is more affordable than any type of permanent life insurance, which stems from the fact that it doesnt have an investment component nor does it last the policyholders entire lifetime.
20 years is one of the most popular term lengths because it suits the needs of many different people. Longer than the shorter terms, like 10 and 15 years, and shorter than the longer terms, like 30 and more, 20 years is the happy medium that can get many people past the milestones they need: paying off a mortgage, putting their kids through college, reaching retirement age, etc.
In terms of affordability, it also hovers somewhere in the middle of the spectrumits not such a short term that its the cheapest option out there, but its not so long that its the most expensive option either. You can see average rates below.
Who Needs a 20-Year Term Policy?
20-year term life insurance isnt relegated to one particular audienceit can be ideal for many different types of people in different situations. These situations include:
If You Have Young Children
If you have young children and youd like to ensure that they will be able to pay for college even if youre not there, 20-year term life insurance can get you to that point. To figure out if 20-year life insurance is enough for this goal, youll need to make some basic calculations: how old is your youngest child, how many years until they finish college?
If your youngest is 5 years old and youd like to finance their college education until they reach age 21 or 22, 20-year life insurance is the ideal choice, as it will last until they reach age 25. Alternatively, 15-year life insurance would not last long enoughit would only get them until age 20. While you can choose 25- or 30-year life insurance, theres no reason to pay more for a longer term if you dont absolutely need it.
If You Have a Mortgage or Outstanding Debt
If you take out a 20-year mortgage to buy a house, a 20-year term policy can ensure that your debt doesnt get passed on to your loved ones in the event you die before the mortgage is paid off.
To be safe, you need to make sure that the 20 years match up exactly, otherwise, there will be a period of time when you are left uncovered. Some people prefer to overshoot and buy a longer policy than their mortgage to be on the safe side. So if you have a 20-year mortgage, you may feel less nervous if you buy a 25-year term policy. If you have a 15-year mortgage, a 20-year policy will be more than enough to keep you safe and secure.
Large student debt is another reason you might take out a 20-year term policy. The policy will ensure that the debt doesnt get passed on to your parents or loved ones if you die before its paid off.
If You Are 20 Years Away From Retirement
Many people who have financial dependents purchase term life insurance as a way to bridge the gap between the time of purchase until they reach retirement age. This is a good idea if you have loved ones who depend on you for financial assistance during your working years, but by the time you reach retirement, you expect them to be financially independent.
If You Want to Supplement Permanent Insurance
Some people buy 20-year term life insurance as a way to supplement their permanent insurance policies during the years when they would need extra money the most, such as when raising a family or if they need to pay alimony or child support.
How Much Does a 20-Year Term Life Insurance Policy Cost?
Many factors determine the cost of any given life insurance policy, as well discuss below. To give you an idea of what you can expect to pay for 20-year life insurance at different ages, check out the results we got from our instant quote calculator.
Below are the average rates for a 20-year, $500,000 term policy for relatively healthy males/females in New York. Bear in mind that prices will change depending on your location, amount of coverage, and other factors.
Notice that when you purchase a 20-year life insurance policy at age 60, the prices really jump. Even at age 50, youll be paying significantly more in monthly premiums than you would if you purchased a policy at age 40.
Since age greatly affects how much you pay in monthly premiums, we always recommend buying life insurance at as young an age as possible. This way you lock in lower rates AND get the peace of mind that comes from having your loved ones covered. You can learn more about how age affects life insurance rates here.
Youll also notice that the rates for women are much lower than those for men. Unfortunately for men, theres nothing much to do about this. Women are given lower rates in every age bracket since they live longer than men statistically.
20-Year vs. 30-Year Term Life Insurance
When youre in your 20s or 30s, it can be hard to anticipate your needs in the future. Both 20- and 30-year term policies seem promisingso how can you decide which one is best for you?
On one hand, you dont want to buy a policy thats too short and end up having to renew it at higher rates. On the other hand, you dont want to overshoot and buy a policy thats too long, paying higher premiums unnecessarily for 30 years.
If youre struggling with the decision of whether to buy a 20-year or 30-year policy, consider this:
Why are you buying life insurance?
20-year life insurance is a good buy if you want life insurance for a specific reason, i.e. to get you to retirement or until you pay off a mortgage. Its more affordable than 30-year life insurance and offers more flexibility in terms of what to do when the policy ends.
30-year life insurance is more expensive since the term is longer, but the benefits include having coverage for a longer period of time in case unexpected issues arise. For example, if you develop medical issues or a chronic health condition, you may appreciate having a longer period of coverage. 30-year term offers more flexibility in terms of reaching lifes goalsif it takes you longer to reach a stable financial state or your children delay going to college for a few years, you can still be safe with a 30-year policy.
When it comes to choosing which term to get, the bottom line is that you have to make the best decision possible with the information you have now. If you cant afford 30-year life insurance, the decision to buy a 20-year policy is easy. If you have other considerations, take your time and consult with experts if possible to help you make the best decision.
What Factors Affect the Cost/Rates of Life Insurance? As you can see from the sample rates above, there are several basic factors that affect the cost of life insurance.
Age
Gender
Location
Policy length
Coverage amount
Smoking status The basic rules of thumb are that the older you are, the longer your term, and the more coverage you getthe higher your life insurance rates will be. Additional factors that life insurance underwriters examine to determine the cost of life insurance include:
Health
Lifestyle
Type of policy (term, permanent, no exam)
Additional riders
Health
In traditional term policies, health plays a crucial role in determining how much you pay in monthly premiums. The sample rates above are for males and females who are pretty healthy (one of the given choices on the dropdown menu on Sproutts instant quote calculator). If you were to choose the other optionsvery healthy or averageyou would see your life insurance rates drop or rise accordingly.
The reason health affects your rates so poignantly is that the state of your health is inherently related to your life expectancy. Since someone who is pretty healthy has a shorter life expectancy than someone who is very healthy, the insurer takes on a greater risk by insuring them. To cover that risk, insurers raise the premiums.
The same is true for gender and smoking status. Since women live statistically longer than men, insurers take on less risk by offering coverage. Therefore, women get lower rates. Smokers, on the other hand, pose a much greater risk than non-smokers. Therefore, they are charged significantly more for life insurance across the board, at all ages.
Lifestyle
Lifestyle is another factor that insurance underwriters take into account: do you have a dangerous job or hobby that might shorten your life expectancy (policeman, firefighter, rock climber, etc.)? Do you have DUIs? A DUI conviction can make it hard to get approved for life insurance, and if you do get approved, you will likely be given higher rates.
Type of Policy The type of policy you buy directly affects your life insurance rates. Permanent is always more expensive than term, and a longer term is always more expensive than a shorter term. No exam life insurance is another type of life insurance that is offered as both whole and term life insurance. Its considered a separate category because it doesnt require the typical medical exam that other policies do. There are several benefits of choosing a policy that doesnt require a medical exam:
Easier approval: People who have serious health issues can get easier approval for no exam insurance since these policies put less emphasis on health.
Faster approval: There are different types of no exam policies. Some include a small amount of underwriting while others dont have any underwriting. With limited or no underwriting, applications are approved much faster than those of traditional policies.
Convenient: You can skip the medical exam and apply entirely online. No exam policies are also important for people who have a fear of needles or medical exams. While no exam policies certainly have their benefits, the main drawback is that they tend to be more expensive than traditional policies since insurers are not able to accurately assess their risk. For some people, the higher prices are worth all the benefits. And people who are in very good health can end up getting competitive rates with a type of no exam policy called accelerated underwriting. If youre interested in learning more about no exam life insurance, read our comprehensive article here.