Life Insurance Term Plans You Do (And Don’t) Need

When it comes to the many life insurance term plans out there, you may feel overwhelmed by the options and what makes them different. Or perhaps you simply avoid thinking about it because it’s all just too much.

If this sounds like you, this article is a must-read. We break down the life insurance term plans you do – and don’t – need based on your current situation, your financial goals, and even your budget. So read on!

What is Term Life Insurance?

Term life insurance is a type of coverage that protects your loved ones financially in the event of your death during a specified period (typically ranging from 10 to 30 years). It is a popular option for those who have short-term debts, a mortgage to pay off, or people in their life who depend on their income. The great thing about life insurance term plans is their affordability factor when compared to permanent life insurance – and the flexibility when it comes to selecting the term length that is right for your individual needs.

Why Life Insurance Term Lengths Matter

If you’re wondering if the term length actually matters, it really does. Here’s why: To put it simply, life insurance term plans were designed to accommodate the unique needs of an individual and their loved ones. Not to mention, the shorter the duration of the term, the more affordable it is!

For example, if you have a loan that will be paid off in 10 years or less, there’s no reason to pay extra for a 20- or 30-year term life insurance policy. But if you have 25+ years left on your mortgage, and you know that your spouse would be unable to keep up the payments without your second income, a 30-year term would be your best bet.

Always speak with a licensed advisor to review your needs and understand your options before you choose your life insurance term plan.

Common Term Lengths and Their Uses

Life insurance is typically sold in terms of 10, 20, 30 – or rarely, 40 – years. Here’s a quick way to decide which one might be right for you.

Term 10

A 10-year term life insurance policy is ideal for temporary needs – for example, if you have debts that will take 10 years or less to pay off, such as a car or student loan. It’s also a guaranteed way to provide financial support for dependent children in the event of your death. After 10 years, you have the option of re-evaluating your needs and either renewing the same coverage, or adding more.

Term 20

A 20-year term life insurance policy is a common choice for individuals or families with longer term financial obligations – for example, if you have less than 20 years remaining on your mortgage or wish to leave enough money to cover your children’s education. With Term 20, you also have the flexibility to extend coverage to a longer term if needed.

Term 30

A 30-year term life insurance policy is best for those who want long-term peace of mind – for example, if you have financial obligations that will extend into your retirements years, like a 25+ year mortgage or adult children with special needs (i.e., dependents). While you can’t renew a Term 30 policy, you still have the flexibility to convert to permanent life insurance – coverage that never expires unless you fail to make payments or decide to cancel it.

Term 40

While 40-year term life insurance policies are rare in Canada, they are also significantly more expensive than shorter term policies. That’s why, if your needs are longer than 30 years, the experts recommend alternatives like the more affordable Term to 100 policy – or, if you’re looking for a policy with an investment component – consider converting to whole life.

When You Don’t Need a Long-Term Policy

At the end of the day, how do you choose between a policy that is short-term versus one that is longer in length? It really comes down to two simple things: your needs and your budget.

1. Your needs

If you’ve done the math and the financial obligation you are looking to cover will be paid off in just a few short years, that’s a really easy way to know you don’t need a long-term policy. Similarly, if you’re looking to cover your children’s lifestyle until they leave the nest – and they are less than 10 years away from moving out – a short-term policy is probably your best bet.

2. Your budget

But of course, you also need to be able to afford your coverage! If you have a set budget – and not a whole lot of wiggle room – your advisor may recommend you go with the shortest term based on how much more affordable it may be. One thing to note is that extending it when the term is up can end up being more expensive over the long term, so you may want to compare the pros and cons of both options. See examples of this further down in this article.

Choosing the Right Term Length for Your Situation

If you’ve decided a life insurance term plan is the right option for you, you may be wondering which length to go for. Consider the following factors, and how they might impact your decision:

• Your age
• Your family situation
• Your financial goals
• Any outstanding debts

We offer a simple decision-making tool to help you match your needs with the right term length for you. Check it out!

Common Mistakes When Choosing a Term Length

If you’re clear on your needs, your budget, and your financial goals, and if you’ve carefully considered all of the factors that might influence your term length, you may have a better understanding of what term length is best for you.

Still, it’s always best to speak with a licensed advisor to make sure you’ve considered everything. And be sure to avoid these common mistakes when selecting your life insurance term plan:

• Going for the cheapest option and choosing too short of a term for your needs. In this scenario, your needs will outlive your coverage, and could leave your loved ones in a financially precarious situation if you were to pass away after your coverage expired.
• Opting for a longer term than needed because you have the extra cash. In this case, you would be paying unnecessarily high premiums – that’s money you could put towards a whole life insurance policy that comes with an investment component – where you’d be earning money over the long term.
• Underestimating future financial needs. It can be difficult to predict what your needs will be in the future, which is why this requires a sit-down with your partner, followed by a financial analysis with a licensed advisor.

The good news is, even if you do end up making one of the mistakes noted above, it can be an easy enough fix. That’s because you actually have the flexibility to reduce your coverage amount at any time¹, renew your term policy once the term is up, or convert it whenever you’d like.

Keep in mind that your life insurance policy will never be cheaper than now – so it would be wiser to purchase a 20-year term from the beginning, rather than renewing your 10-year term policy a decade from now. (Recall: Age affects cost.)

Compare the cost² for $100,000 in coverage for a 30-year-old non-smoking woman who purchases and later renews a Term 10 policy vs. selecting a Term 20 policy from the start.

While the first 10 years are cheaper with a Term 10 policy, that changes if you decide to renew once the term is up. That’s because you are charged a “renewable rate,” based on age, where the rate increases every year after the initial term. As you can see, this ends up being quite a bit more money over a 20-year period.

You’d be spending a total of $3,098.52 over a 20-year period if you purchase a Term 10 policy at age 30 and renew 10 years later. But if you purchase a Term 20 policy from the start, it would be significantly less at only $2,397.60 over 20 years, which is a savings of about $700.

The moral of this story is: If you know you’re going to need a longer term length, it is to your advantage to select that term from the beginning.

How to Adjust Your Term Length Over Time

If you already have a term policy and you are wondering if it’s still right for your needs, the best time to re-evaluate your coverage is when your life circumstances change, for example:

• Have you recently bought a house? Is your mortgage paid off?
• Did you welcome a new addition to the family? Have your children recently left home to pursue their own career?
• Did you just get that promotion you’ve been waiting for? Are you nearing retirement?

The reality is, you could be underpaying or overpaying on your life insurance coverage depending on what big change has occurred in your life. A rule of thumb is to book a review with a licensed advisor each time you experience one of life’s major milestones.

When evaluating your coverage, you may realize you need something permanent – or perhaps you’re looking for an alternative to traditional investing with long-term earning potential. In this case, you may want to consider a whole life policy. Learn more about its potential for growth in this article, The Compound Effect: Grow Your Money With Whole Life Insurance.

Finding the Right Life Insurance Term Plan for You

When it comes to selecting the right term life insurance for you, there are many factors involved – but that’s a good thing! This means you can customize your plan to suit your needs.

The best thing to do is consult with an expert to determine the optimal term length. Ready to get started? Fill out the form below, and we’ll connect you with a licensed advisor near you!

Disclaimers

¹Minimum decrease is $25,000; remaining balance must meet plan minimums.

²Illustration as of December 2024.