What’s the Downside of 30-Year Term Life Insurance?

Liz Caldwell is a senior director of Insurance Solutions at Northwestern Mutual.

Parenthood brings so many exciting new experiences, like bringing a new baby home, a toddler’s first steps and the first day of school. The reality of being a parent can also mean sleepless nights as you worry whether your kids are eating enough and hitting developmental milestones. Your new concerns might even include providing for your family and how they’d get by if something happened to you.

To ease financial worries and help protect their families, many new parents get their first policy or increase their life insurance. Here we’ll talk about a particular type of life insurance known as “level term life” or “30-year term” and share some points to consider before you get it.

What is level term life insurance?

Let’s break down what “level term life insurance” means by starting with the “term” aspect. Term life insurance lasts for a specific number of years, so it’s designed to be temporary. Your beneficiary gets the payout, or death benefit, if you pass away during the term. If you don’t die during the term of the policy, then your policy simply ends.

The opposite of term life insurance is permanent life insurance, especially whole life insurance. This type of coverage lasts your lifetime as long as you pay your premiums. Your beneficiary will get the payout no matter when you die.

Whole life insurance also builds cash value as the years go by. That’s a powerful feature that allows you to build up money and borrow against your policy for any reason.¹ Term life insurance doesn’t provide this cash value, and it’s one of the big differences between term vs. whole life insurance.

Now we’ll explain the “level” part of “level term life insurance.” This type of policy lasts for a set number of years—often 10, 20 or 30. Its premiums are even, or level, the whole time. So even as you get older, your payment stays the same rather than increasing as your risk of passing away gets higher. In a way, you overpay at the beginning, and as the years go by, you pay less than those years’ costs. Here at Northwestern Mutual, we’re proud to be the largest direct provider of life insurance in the U.S.² We satisfy our clients’ needs for term insurance with 10-year level term, 20-year level term or annually renewable term, a term product for which you pay for each year’s costs in that year. We don’t offer 30-year level term because we offer more comprehensive and flexible ways to provide life insurance for new parents and others.

Though there are many other types of life insurance, there are some reasons that level term life insurance appeals to new parents and other people thinking about getting coverage. We’ll describe them below, along with some implications to consider before you get locked into this type of policy for three decades.

Pros and cons of 30-year term life insurance

Here are some things to think about when considering 30-year term life insurance:

PRO: It’s affordable.

Term life insurance is usually best for you when you need a large death benefit for a situation that will end someday and when budget is a big concern. But if you don’t die during the term, there’s no payout.

You’ll pay more upfront than you would for a term policy that renews each year. So if you’re looking for the lowest initial payments, think about a term policy that renews yearly. This type of policy from Northwestern Mutual will also give you the option to extend your coverage by converting to whole life insurance without a review of your health history (called “underwriting”).

PRO: The predictability of the payments can be appealing.

The payment amount won’t change as the years go by. (The payout, or life insurance death benefit, also remains the same.) The flipside of this is that the policy is rigid, meaning there’s little you can change as life goes on. For example, if you get promoted and have a higher income to protect, you’d need to begin an additional policy when you’re older—and possibly less healthy.

CON: The time frame can seem right, but it’s hard to nail down.

When you have your first kid or reach another milestone, a 20-year level term policy may seem too short. After all, it’ll be at least 21 years before the first kid is through college. If you have more children, it will be even longer.

So, parents often pick the 30-year time frame. While that may sound like a good idea, it may not be the best option—and here’s why. Life insurance premiums depend on how likely you are to die in any given year. As you get older, that likelihood increases. That’s why many term policies can be very inexpensive when you’re young but get more expensive as time goes by. Level term simply evens out that cost so that, in a way, you “overpay” in your early years and then “underpay” in later years.

If you could somehow predict your exact financial situation 30 years into the future, then a 30-year level term life insurance policy might make sense.

But we all know that life changes, and unexpected things flare up. So, it’s common for people to make changes to their life insurance throughout the decades. For example:

• You might decide at some point that you don’t need as much term coverage. Let’s say 25 years from now you have two kids through college, the house is nearly paid off and you have ample savings. You might want to reduce your term coverage. But if you give up your term insurance before year 30, you overpaid for your coverage and most likely would have been better off purchasing a product with increasing premiums.

• Or you might decide that you want to convert some or all of your term policy into permanent coverage in a process called “term conversion.” That way, you can take advantage of the additional benefits of permanent coverage without going through another review of your medical history. You may have a shorter window of time to convert a level term 30-year policy and will most likely have “overpaid” for your term premiums.

CON: You might be reluctant to stop once you’ve started.

This is where the biggest issue comes in with a level term policy: It lasts such a long time. You’ve overpaid by what can be a significant amount at the start. Then you’ve eventually started to “win” with lower payments. So it may feel like you’re losing out if you change your policy 20 or 25 years into it. And if you do end up making changes, it means you likely paid more than you needed to for your term coverage.

There are many different types of term insurance that can get you the coverage you need, at a more affordable cost. They can also give you the flexibility you’ll likely want over the course of your life. You might even get a mix of policies because people can have more than one life insurance policy.

Talk with your Northwestern Mutual financial advisor to get an estimate of how much coverage makes sense for you. After learning about your family and goals, your advisor can recommend the best type of policy. They can also look beyond insurance at your entire financial plan to reveal opportunities and blind spots that might otherwise go unnoticed.