Is shorter or longer term insurance better?
[social_share]Term life insurance is unlike most other financial products in that the short-term insurance tends to cost less than the long-term insurance. There are good reasons for this. It can also make the issue of whether it is better to buy longer-term or shorter-term insurance more complex.
As people grow older, their life expectancy falls. This means that their life insurance premiums will increase over time. If a person was thirty years of age and wanted insurance over the next year, then the cost of that policy would be somewhat less than it would be at fifty. However, this can be confused in term insurance.
The main reason why it can be confused is that the whole cost of the policy is calculated at the beginning of the term, and this cost is charged over the term in equal monthly instalments known as premiums. This means that the premiums for a longer term will tend to rise, as (for example) the twenty-year coverage of a forty-year-old policy holder will not simply cover that person at forty, but also at fifty-nine, when he or she will cost quite a bit more to insure.
For this reason, a person who is comparing five-year to twenty-year term insurance policies is not really comparing like-for-like. What they should do in an ideal world is get quotes for what a five-year term life insurance policy is likely to cost in five, ten and fifteen years’ time, and then average out the premiums.
In the real world this becomes too time-consuming to be practical. A long-term life insurance policy tends to be better value for two reasons, the first being that the insurance costs are lower and the second that the costs of insuring a person in later life can increase dramatically, particularly if there is a medical issue. The costs of life insurance can be very high if delayed. This is why life insurance policies can become quite valuable towards the end of their term.
The rule of thumb is to take the life insurance that will cover the whole of the period in question (for example, if taken out for a child, to the expected end of the child’s university career) unless there are some serious issues with income. It is far better to decide on the term of the insurance before comparing different offerings, as the premiums quoted are otherwise unlikely to compare like-for-like.
