What term is the right term?

The vast majority of life insurance sold in Canada is Term Insurance. Term Insurance provides a low cost of insurance allowing for large benefit amounts. Term Insurance typically comes in two “flavours” 10-Year Term and 20 Year Term. Which is right for you?

The length of your term starts with the need for insurance. A common use of term insurance is to pay off a mortgage or debt upon a death. Most traditional mortgages are 20 years long, with newer extended amortization mortgages at 35 and 40 years becoming more and more popular. For this example lets use a 20 year mortgage for $300,000 as our starting point. There are several way we can insure that mortgage, 2 ten year terms, or one 20 year terms.

Male age 35, Non-Smoker, regular health
Term 10: $235/year
Term 20: $359/year

On the surface a 10 year term looks cheaper than a 20 year term. However, in 10 years the first term will expire and need to be renewed. The person’s age would now be 45 and the guaranteed renewal 10 year term would cost $1,162/year

Total Cost over 20 years
Term 10 = (235x10) + (1162x10) = $13,970
Term 20 = 359x20 = $7,180

Term 20 wins hands down. HOWEVER, taking the guaranteed renewal is only one option; you can also REPLACE the policy with a new one, if you are healthy. The insurance company guarantees that once you are insured you are always insurable as long as you pay your premiums. At the end of the 10 years, even if you are terminally ill you can keep your policy, you just have to pay for it. The insurance company knows that if you are terminally ill you will pay just about anything to keep the policy so they can charge whatever they want. The other situation that crops up is that people are lazy, and they hate insurance companies, so when their term runs out, it will automatically renew, but at a higher premium. People will simply pay this higher premium without checking to see if there are better options available on the market. The price goes way up, and the apathetic pay it without question.

So your 10 year term is up, you are in good health and paying over a thousand bucks a year doesn’t really float your boat. You want to know if there is a better rate out there, so you call me, or your version of me. I check the market and see what kind of rate I can get you at your now age 45, low and behold I can get you another 10 year term policy for $404/year, almost 2/3rds cheaper than your renewal. You have to go through another medical and do the paperwork but most would agree it’s worth it. As it now turns out your two 10 year term policies cost $6390, a full $790 less than the single 20 year term.

Things to consider:

• Cashflow, do you want to pay more now and less later with a T20 or less now and more later with two T10’s
• with a T10 if you become uninsurable after 10 years, you are guaranteed to be stuck with high premiums the rest of your life.
• There is no guarantee what rates will be in 10 years, they may be far higher than today.
• 10 years is a long time, 20 even longer. A lot can happen, marriage, kids, divorce. Most people won’t review their insurance until it renews, reviewing after 10 years is far better than every 20 years.
• More conservative people tend to gravitate towards 20 year term as they prefer the long term security it offers, they are also often worried about their future health and their ability to qualify for new insurance in 10 years. More cost sensitive people tend to prefer the lower cost of entry of 10 year term, they tend to be in better health and not as worried about the future insurance market or their ability to qualify for more insurance later.

I personally prefer 10 year term in most cases. It currently has more price competition, and therefore lower premiums, it also lets me review with my clients more often as they have to see me at least once a decade, even though I prefer far more frequent visits. In 20 years you could go from being single to having grandkids, it’s just too much time. I also like 10 year term especially for credit insurance, as you pay down your debts your need for insurance decreases, after 10 years you can drop your insurance to match your debt load and reduce your premium. Its true you can reduce your insurance at any time, but again most people don’t.

So if you are healthy and think you will stay healthy 10 Year Term is probably for you, if you are worried about your health changing or want the long term stability then consider 20 year term.

An FYI, term 10 pays a lower commission to the agent than 20 year term. A good way to tell if your agent is just sales motivated is to see if they are pushing 20 year term without a good reason. Most good agents would rather sell a 10 year term, take the lower commission, and then be able to sell another 10 year term when that one ends. It indicates a long term relationship is the agents goal rather than a quick buck.