Life Insurance: How Long Should You Keep It?

The length of your life insurance policy depends on your personal circumstances and the reason you need cover. Term life insurance is usually bought for between 25 and 40 years and is most common for families and people protecting a mortgage debt. If you have children, you should take the policy over a time period that will ensure your family is taken care of and that your children are grown up and able to financially support themselves. If you have a mortgage, the number of years that your life insurance policy covers should match the number of years left on your mortgage. If you're planning to pay off your mortgage early, you should still consider buying life insurance for the full term and simply cancel it once the mortgage is paid off.

How long you plan to spend paying off loans

The length of time you plan to spend paying off loans is an important consideration when deciding how long to have life insurance. Life insurance loans are typically only available for permanent life insurance policies, such as whole life and universal life, which have a cash value component. Term life insurance policies, which provide coverage for a set period, usually do not have a cash value and therefore cannot be borrowed against.

Life insurance loans can be a convenient way to access extra cash, especially if you need money quickly and don't want to go through the lengthy approval process of a traditional loan. There is no credit check or approval process for life insurance loans, and the funds can be used for any purpose. Additionally, the interest rates on life insurance loans are typically lower than those for personal loans or credit cards.

However, it's important to consider the potential drawbacks of life insurance loans. Firstly, if the loan is not repaid, the death benefit will be reduced, and your beneficiaries will receive less money. Secondly, if the loan amount and interest exceed the policy's cash value, the policy could lapse, and you may owe taxes on the amount borrowed. Therefore, it's crucial to have a repayment plan in place and ensure that the loan amount doesn't exceed your ability to repay.

When deciding how long to have life insurance to cover loan payments, consider the length of the loan, the interest rate, and your ability to make regular payments. It's also important to weigh the potential benefits and drawbacks of using a life insurance loan to pay off other debts. Consult a financial advisor to understand the full implications of life insurance loans and explore alternative options that may be better suited to your situation.

Whether you have young children

When determining the length of your life insurance coverage, there are several factors to consider, including whether or not you have young children. If you do, it is essential to ensure that they will be financially provided for in the event of your unexpected death.

Life insurance for children can be purchased as a safety net by parents or guardians in case their child passes away. These policies can be term-based, lasting until the child becomes an adult, or permanent, which would allow the child access to coverage for their entire life at a locked-in lower rate. The policy can also be transferred to the child once they are an adult. If the child passes away while they are still a minor, their parent or guardian will receive the policy's death benefit, which can be used to cover funeral expenses or allow them to take time off work.

Having young children is a significant factor when determining the length of your life insurance coverage. You should consider a term life insurance plan of 15 to 20 years or longer to offer security to your family. This will ensure that your policy could help provide for your children until they are through college or out on their own.

Additionally, if you have a mortgage or other debts, it is advisable to get a life insurance policy that lasts at least as many years as you plan to spend paying off these financial obligations. This will protect your loved ones from being responsible for your debts if something happens to you.

In conclusion, when determining the length of your life insurance coverage, carefully consider your current financial obligations, including providing for your young children, and choose a term that aligns with these commitments.

Your age and income

Age

There is no minimum age for life insurance, but most providers require you to be 18 to take out a policy. The older you get, the more you can expect to pay for life insurance. This is because you are considered more of a risk to the insurance provider as you are more likely to die during the policy term. The cost of life insurance typically increases with age, so taking out a policy when you are young and healthy will usually result in lower premiums.

Income

The amount of life insurance cover you need is influenced by your income, as it is often used to replace lost income in the event of your death. The cover should be based on your current income and the number of years it would need to be replaced. For example, if you want to insure an income of £20,000 for 10 years, you would need cover in the region of £200,000.

Your income also affects the type of life insurance policy you choose. For instance, decreasing term life insurance is a popular option for those who want to cover a repayment mortgage in the event of death, as it guarantees that the mortgage will be cleared in full. On the other hand, increasing term life insurance can be useful for keeping pace with inflation, as the amount you are insured for increases over time.

In summary, your age and income are crucial factors in determining the length of your life insurance policy. While your age influences the cost of premiums, your income helps establish the level of cover you need and the type of policy that best suits your circumstances.

Your mortgage or other debt

Life insurance is often considered when taking out a mortgage, especially if you are buying a home with a partner. It can be a way to ensure that your loved ones are not burdened with debt in the event of your death.

Mortgage Life Insurance

Mortgage life insurance, or mortgage protection insurance, is a type of insurance that is designed to pay off the remaining balance of your mortgage if you die. The mortgage lender is the beneficiary of the policy, not your family, and the benefit is paid directly to them. This type of insurance is usually sold by the mortgage lender or an affiliated insurance company. The premiums can be rolled into your loan, but they tend to be high, and the payout decreases as the mortgage debt decreases. This type of insurance lacks flexibility, and your loved ones will not receive any money, which means they won't be able to use the benefit for other expenses.

Term Life Insurance

An alternative to mortgage life insurance is term life insurance. This type of insurance allows you to choose the coverage amount and policy length, which can be matched to the length of your mortgage. The beneficiary of a term life insurance policy, usually your spouse, can use the payout for any purpose, including paying off the mortgage. The death benefit does not decrease over time, and your loved ones will have more flexibility in how they use the money.

Whole Life Insurance

Whole life insurance is another option that lasts for your entire life, rather than a fixed term. It has higher premiums than term life insurance, but the death benefit does not decrease, and the policy builds wealth over time through a cash value growth component. This can be borrowed against to help pay down your mortgage faster.

Critical Illness Cover

While not a life insurance policy, critical illness cover can provide a financial safety net if you become ill. It pays out a cash lump sum that can be used to keep up with mortgage repayments while you focus on your health.

Factors to Consider

When deciding whether to get life insurance to cover your mortgage, consider your loved ones' financial needs. If they rely heavily on your income, a mortgage life insurance policy can ensure they are not burdened with debt. However, if they can afford the mortgage without your income, a traditional term life insurance policy may be a better option as it provides more flexibility in how the benefit is used.

Additionally, consider your mortgage balance and term. If you are close to paying off your mortgage, you may not need a policy. On the other hand, if you have a large balance or a long term remaining, a policy may be necessary.

Your budget is also an important consideration. Mortgage life insurance can be expensive, especially compared to the level of coverage provided. Weigh your budget against your life expectancy and your loved ones' ability to pay off the mortgage.

Finally, keep in mind that life insurance is not a legal requirement for getting a mortgage. However, it can provide peace of mind and financial stability for your loved ones should something happen to you.

Whether you plan to have children

Whether or not you plan to have children can be a significant factor in deciding how long you need life insurance. If you're considering starting a family, it's essential to plan for the financial security of your future children in the unfortunate event of your untimely demise.

Life insurance can provide a safety net for your children's future, ensuring they have access to funds for their education, daily needs, and overall well-being. The proceeds from a life insurance policy can also help your spouse or partner shoulder the financial burden of raising a family alone. When calculating the duration of life insurance needed, consider the number of years until your future children reach financial independence, which is typically attained in early adulthood.

If you already have children, the length of your life insurance coverage should ideally span the period until they complete their education and become financially independent. This ensures that your children's guardian or surviving parent can provide for their needs, including education, childcare, and medical expenses. Additionally, life insurance can help protect your family's home and standard of living during this challenging time.

On the other hand, if you do not plan to have children, your life insurance needs may differ. Without dependents, the primary purpose of life insurance shifts from providing financial support to ensuring that your debts, final expenses, and other financial obligations can be met. Consider the impact of your passing on your spouse or partner, and evaluate whether they would be able to maintain their standard of living without your financial contribution. In this case, the duration of life insurance coverage may be shorter, focusing on covering any shared debts, mortgages, or other financial commitments.

In conclusion, when deciding how many years to have life insurance, carefully consider your plans for starting a family. If children are in your future, aim for life insurance coverage that will protect them financially throughout their childhood and adolescence. If you do not plan to have children, evaluate your financial commitments and ensure that your life insurance policy is sufficient to cover any debts or expenses that may impact your spouse or partner. By tailoring your life insurance decisions to your family plans, you can achieve greater peace of mind, knowing that your loved ones will be financially secure, regardless of what the future holds.

Frequently asked questions