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Don’t pick a term length without reading this advice from Ramsey.
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Term life insurance policies are the best type of coverage for most people. This type of life insurance is in effect for a limited period of time, as opposed to whole life coverage which remains in effect for as long as premiums are paid. Since term life is much less expensive and most people don’t need permanent coverage, it’s usually the ideal option.
When buying a term life policy, the policyholder will need to decide how long the term lasts. This can be a complicated decision, but finance expert Dave Ramsey has some advice on choosing an appropriate term length. Here’s what Ramsey has to say on the issue.
Here’s what Ramsey says about an appropriate term length for life insurance
Most life insurers offer the option to buy term life insurance that is in effect for between 10 years and 30 years. But, Ramsey suggests a time frame somewhere in the middle of that range.
“Likely, you’ll want a policy for 15-20 years,” Ramsey said. “That’s long enough to give the kids time to grow up and (fingers crossed) get out on their own (meaning they’re no longer dependent, they’re independent!). It also allows you and your spouse time to build enough wealth to self-insure.”
Following Ramsey’s advice here would mean that the death benefit pays out only for policyholders who die within 15 to 20 years from the time of purchasing a policy. If coverage is purchased at the age of 30 for a 20-year term, the policy would be in effect until age 50. After that time, the death benefit would not pay out.
When the term policy ends, the policyholder might be able to renew it, get new coverage, or switch to a whole life policy — if they still need insurance. But there’s no guarantee any of these would be options as a lot would depend on health status, among other factors. Getting a new policy after that time could also cost a lot more in premiums, since insurers set prices based on age and risk of death during the coverage term.
Is Ramsey right?
For some people, Ramsey’s advice makes sense. But, the right coverage term should be determined based on the specific situation of the policyholder.
If someone buys life insurance at 25 after getting married but doesn’t plan to have kids for another five years, a 15- to 20-year term likely wouldn’t be nearly long enough. A 20-year term would run out at 45 when the kids are still in highschool and college bills haven’t yet been paid.
Buying life insurance at a younger age is also usually much cheaper for policyholders — but it means buying coverage for a longer term. For example, a person who buys coverage at 20 in anticipation of future marriage and children would definitely need a term that’s far longer than 15 years, or they might not even have coverage left by the time they get around to marriage and having their first kid.
Before deciding what term length is best, policyholders need to look at how long their loved ones really will depend on them — and make sure their policy lasts at least that long so they don’t leave their dependents struggling because the insurance ran out too soon.
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