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One of the biggest life insurance decisions you will make is deciding between whole life insurance, and term life insurance. Most people logically settle that by going with term. It’s not only cheaper than whole life, but much cheaper. After that, the next major decision is the length of the term. 20-year vs 30-year term life insurance is a common comparison since they are two of the most popular terms.
There are advantages and disadvantages to both terms. To help you reach a decision, we’re going to analyze the similarities and differences between the two terms. Hopefully, that will enable you to arrive at a clear choice for your own personal circumstances.
20-Year vs 30-Year Term Life Insurance – The Basic Differences
Whether you decide on a 20-year term or a 30-year, both policies are basic term life insurance plans. That means that they are pure life insurance. Unlike whole life insurance, you’re not paying for both life insurance and an investment provision. For this reason, whether you choose a 20-year policy, or a 30-year one, you will pay only a fraction of the premium that you will for a whole life policy.
Since there is no investment provision, there is also no ability to borrow against your policy. But as you probably already know, investment returns on life insurance policies are typically less than what you can get by investing on your own in exchange traded funds tied to the S&P 500. That’s where the saying ”Buy term and invest the difference” comes from.
Obviously, the critical difference between the two plans is the length of the term – the difference is a full decade. On the surface, it may seem that going with a 30-year policy makes perfect sense, all things being equal.
But even though the two plans are similar, all things are not equal. Most important perhaps, the 30-year policy costs more on an annual basis. This is due to the fact that the longer coverage term has a higher risk of death. The insurance company must adjust for the greater likelihood of making a death benefit payout over 30 years than they will over 20.
And of course, not everyone has similar life insurance needs. One person may need full life insurance coverage for 30 years, while another’s needs may be met nicely with a 20-year policy. You have to evaluate both your need for coverage and your financial ability to afford the premium.
The Advantages of a 20-Year Term Life Insurance Policy
Cost is the major advantage of a 20-year term life insurance policy. A 25-year-old healthy male non-smoker can purchase a 20-year term policy with a $500,000 death benefit for about $300 per year, or $25 per month. That’s well within the range of affordability even in budget-conscious households.
You may also need maximum coverage for no more than 20 years. For example, let’s say that you have two children, ages seven and five. A 20-year policy will provide you with coverage until your children are 27 and 25 years old, respectively. That will not only bring them to adulthood, but it will likely see them through the high-cost college education years. As a parent, you will want to be certain that you have sufficient life insurance to provide for your children until they reach at least those ages.
In addition, if you are financially conservative, you might not need as much life insurance at the end of 20 years. For example, if you have less than 20 years remaining on your mortgage, and you otherwise don’t have much debt, you won’t need a policy greater than 20 years to pay off your family’s debts.
And if you are a committed saver, who also invests regularly, you might be partially or totally self-insured by the time the 20-year policy ends.
For example, let’s say that at age 30 you take a 20-year term life insurance policy for $500,000. At the end of 20 years, you have accumulated $250,000 in savings and investments. At that point, you may be able to reduce your life insurance coverage to $250,000. That would reduce the premium that you would otherwise pay for either the renewal of the 20-year policy, or in the purchase of a replacement policy with a smaller death benefit.
The Advantages of a 30-Year Term Life Insurance Policy
Let’s start with the lone disadvantage of the 30-year term vs the 20-year: premium level. The premium will be roughly 50% higher on a 30-year term than on the 20-year. For a 25-year-old healthy male non-smoker, the premium for a $500,000, 30-year term policy would be about $450 per year. That’s $150 per year more than the 20-year term policy, or about $3,000 higher over 20 years.
Now if you’re on a very tight budget, $3,000 can matter, even though it spread out over two decades. But the 30-year term policy comes with a lot of undeniable benefits.
For starters, 30 years is generally the longest term policy. It’s the closest thing there is to permanent insurance among the term group. That’s because 30 years provides enough coverage for most of the major events that take place in a human lifetime. For example, if you take a 30-year term policy at age 30, you’ll have full coverage all the way to age 60.
That will not only enable you to raise your children to adulthood, but it will get you right to the threshold of retirement. Presumably, by the time you reach that age, you’ll be virtually self-insured and life insurance will no longer be necessary.
Just as important, the 30-year term policy keeps your policy in force – and your premium level – for an extra decade.
Why is that important?
A 20-year term policy may need to be renewed at the end of the term. When you go to renew it, you will pay a higher premium. That’s because you will be 20 years older than when you took the original policy. Whether you renew the original policy, or replace it with a new one, the premium will be considerably higher based on your age.
Final Thoughts on 20-Year vs 30-Year Term Life Insurance
For most people, a 30-year term policy will work better. Yes, it is more expensive than the 20-year policy. But the extra 10 years that you get provides many more options. For example, in the event that you were not in a position to be self-insured after 20 years, you’ll have an extra 10 years to make it happen.
There’s an even more important reason. Should you develop a chronic illness during the initial 20-year term, your premium will be much higher on renewal or replacement. That’s because not only will age be a factor, but so will the health condition. With the 30-year policy, you avoid that situation completely.
If you can stretch your budget a little bit further, the 30-year term policy will give you more options later in life. Give us a call, or complete the quote form on the left. We’ll get you the policy that you need, with a premium you can afford. And that’s whether it’s a 20-year term policy, or a 30 year. In every case, we’ll work out the policy that works best for you.