Here’s the situation: you’re buying term life insurance and you’re wondering just how long you need the term to last. Twenty years? Thirty years? Twenty-five years? Twenty-six? (Spoiler: twenty-six years is probably not an option.)
In this case, figuring out the answer is actually quite simple. The reason we buy term life insurance is to protect our families and dependents from having to deal with our financial burdens in case we die prematurely. The "term" part of term life insurance needs to last as long as our longest financial burden.
Let’s look at a few examples:
Cosigned student loans (ugh)
David is twenty-six years old and has just graduated from graduate school. He had to take out a lot of private student loans in order to pay for school. He didn’t have good enough credit to get the loans on his own, so he asked his parents to cosign the loans with him. While they don’t have to pay his monthly student loan bill, they would be on the hook to finish paying for them if he were to die young. David buys a term life insurance policy that lasts for ten years – the same amount of time it will take him to pay off his student loans.
Kim is thirty years old and has just married the love of her life, Jim. Jim and Kim know they want kids – and fast. Jim decided that he’ll put his career on hold to raise the kids, while Kim will continue working as a software developer. Since their growing family would be financially (and emotionally) devastated if Kim died, Kim and Jim decide to buy her a 30-year term life insurance policy, so that Jim will still have the financial means to raise their kids and send them off to college.
Ricky and his wife, Lucy, just bought a house. Like most people, they took out a mortgage in order to pay for their new home. Paying off that mortgage is reliant on the idea that there will be two salaries coming in. Ricky and Lucy thought it prudent to buy a term life insurance policy for each of them, lasting thirty years – the length of their mortgage. They also bought long-term disability policies for the two of them, but that’s a different story.
Going into business (Yay! [hopefully!])
Justin and Phil are two software engineers who have decided to start a small game development studio, primarily focused on making iPhone games. They need each other to keep the business going – if one of them were to die unexpectedly, it would be impossible to keep the development studio going. Justin and Phil decide to buy term life insurance policies for twenty years, naming each other as the beneficiaries. While getting a term of twenty years might seem a little optimistic, they’re bullish on the business. Plus, they can always change the beneficiary later if things don’t work out as planned.