Two of the most popular types of term life insurance are 10 year and 20-year term policies.
Which is the right policy for you?
Let’s do an analysis of 10-year vs. 20-year term life insurance, and see if we can sort this out. The answer will depend mostly on your own personal circumstances, but there are some general factors that you should take into consideration when making the decision.
10 Year vs. 20 Year Term Life Insurance – The Basic Differences
All term life insurance policies have a few things in common. Unlike whole life policies, they are limited to the number of years that they are in force. That means that they are temporary policies, while whole life represents permanent life insurance. They also accumulate no cash value, which means that they are pure life insurance.
Now in case you think whole life is better than term, understand that whole life costs a lot more money than term. How much? Roughly 10 times as much for a policy with a comparable death benefit.
But let’s get back to 10 year vs 20 year term life insurance.
There are two basic differences between the 10-year and 20-year policies. The first is obviously the length of the term. The 20-year policy is simply twice as long as the 10 year.
But the most significant difference is the price…
We’ll use the example of a 40-year-old male, non-smoker, and in good health. He will qualify for a standard rating based on his personal health and his family’s medical history. He is purchasing a $1 million term life insurance policy, and deciding between a 10-year term and a 20-year term.
Cost of the 10-year term policy: $750 per year
Cost of the 20-year term policy: $1,250 per year
The insured will save about $500 per year in premium with the 10-year policy. That’s about $5,000 over the full 10 year period. The disadvantage is that he will have to renew his policy at the end of 10 years if he still needs coverage.
The advantage of the twenty-year policy is that the insured will have coverage guaranteed for 20 years, at the same premium level.
Why You Might Go With 10 Year Term Life Insurance
There are two main reasons why the 10-year term policy would be preferable to the 20 year:
- You absolutely cannot afford the extra $500 per year for the 20-year policy, or
- Your need for a large amount of life insurance is unlikely to go beyond 10 years.
The major downside is that getting a replacement policy once your 10-year term expires could end up costing more than the original premium on the 20-year term policy. For example, the renewal at the end 10 years may result in a premium costing several thousand dollars per year.
That may be several times higher than what you what you would have paid for the 20-year policy.
There’s an even more extreme outcome. That is that at the end of the 10-year term, you are no longer eligible for life insurance. That could happen if you experience a significant health issue. For example, if you’re diagnosed with hypertension before the 10-year term expires, you will pay even more for coverage than if you were in excellent health. And if you had a major health event, like heart disease or cancer, you may not be able to get a replacement policy at all.
Strategies to Use if You Buy a 10 Year Term Life Insurance Policy
If you fall into one of two categories where a 10-year policy works better, there are strategies you can use that will help when the term ends.
Get a renewable term policy. This will increase the premium a bit, but it enables you to renew the original term without medical qualification. Your premium rate will still increase at the end of the original term. But you’ll be guaranteed the ability to renew the original policy amount, even if your health has declined.
Plan to renew the policy before the term expires. You would use this strategy if the main reason for buying the 10-year policy was the lower premium. Let’s say that three years into the 10-year term, you’re making significantly more money. Rather than waiting until 10 years expire, instead purchase a replacement policy three years in. That will enable you to get the benefit of a lower-priced policy based on your age, and before any health conditions develop. You may even be able to afford the higher premium of the 20-year term policy.
Get a convertible term policy. This is another insurance rider that may increase your premium. However, it means that you will be able to convert your term policy to a whole life policy before the initial term expires. It will also waive the requirement for medical qualification. Once again, the premium on the whole life policy will be higher than the term policy. But the conversion option will give you the ability to turn the temporary policy into a permanent one.
Shop for a new policy before the first one expires. Premiums vary considerably from one company to another. It may be possible to purchase a new term policy for the same or only slightly more than the original.
Why You Might Go With 20 Year Term Life Insurance
If you can afford the higher premium, the 20-year term is almost always better. Yes, the premium is higher, but you will be guaranteed coverage for the full 20 years. As long as you make your premium payment each year, your policy will remain in force.
20 years tends to work well for most people. It covers a sufficient amount of time to raise children, and often to pay off a mortgage. For example, let’s say that you have two children, ages five and three. A 20-year policy will provide coverage until your kids are 25 and 23. That should cover the time that they are most dependent on you, and may be attending college.
After 20 years, you’ll have less need for life insurance. You may be able to cut the policy in half, since you will have fewer obligations.
20 years is also plenty of time to develop a stronger financial foundation. For example, when a policy is taken in your 20s, you’re at the beginning of your career. But by the time the term ends, you’ll be mid-career, and probably well-established. At that point, you might even have an outstanding employer-provided life insurance policy.
In addition, 20 years will give you plenty of time to build up savings and investments. While you may have only a few thousand dollars in savings in your 20s, you may have several hundred thousand dollars when you’re in your 40s.
The same is true with debt. In your 20s, you may have student loan debt car loans, and credit cards. 20 years later, those debts may be gone. Even your mortgage may either be paid off or paid down to the point where it can easily be paid off out of your financial assets.
Final Thoughts on 10 Year vs. 20 Year Term Life Insurance…
The comparison between 10 year and 20-year term life insurance shows just how flexible life insurance can be. There’s a life insurance term, policy and premium level to fit every situation, and every budget.
Whether you choose a 10 year or 20-year policy, or some other type of plan, it’s important to get coverage. We’re here to do just that. Give us a call, or complete the quote request on the left. We’ll get you the policy that you need, with a premium you can afford.