Coming to Terms
Life insurance is an affordable way to protect your family financially in the event you’re not there to take care of them. Life insurance can help with things like paying the mortgage, college tuition, final expenses and more. Typically, term life insurance is the the least expensive life policy to purchase. Term life insurance policies last for a set period, during which you'll pay premiums to the insurance company to maintain coverage. Hence, the name "Term." These policies most often have "level" premiums that remain the same throughout the term, so you don't have to worry about rising premiums.
Coverage typically lasts between 10 and 30 years, which is the term of their duration while in effect. If you pass away during the term, your beneficiaries will be paid a cash benefit. However, once the term ends, there's nothing left. And, if you want to extend coverage, you need to apply for a new term life insurance policy with rates that may be significantly higher because life insurance gets costlier with age. However, if you want permanent coverage, many term policies will let you convert to whole life coverage, at least for an initial period.
There are definite advantages and disadvantages to owning a term life policy. Here are a few on the plus side:
It’s typically less expensive than a permanent or whole life policy.
It can provide a large death benefit at relatively affordably.
Easy to get quotes and apply for coverage online.
Certain policies can be converted to a permanent policy without undergoing another medical exam or underwriting - so future premiums will be based on your current health.
On the negative side of the equation, here are some concerns to consider:
Coverage is temporary and will end once the term expires.
Can be expensive to purchase a new policy at the end of the term, as insurance costs typically increase with age.
If your health declines, you may not be able to get another policy after your term ends.
Term life does not have cash value that can be tapped into while you’re still alive.
Another version of term life insurance is called "Return of Premium." This is a type of term life insurance that returns part of the premiums you paid into your policy when your coverage expires. However, these policies may cost two to three times as much as traditional term life insurance. Most people would be better off saving or investing the difference in premiums to maximize potential gains.
A term life insurance policy could also pay out through living benefits riders. These are policy add-ons that you purchase when you apply for your policy. Your premiums will be more expensive, but you can pull from the death benefit to pay for medical expenses if you have a critical or terminal illness. This option can support end-of-life care, but it decreases the payout your beneficiaries get from your policy. Not all term policies offer this type of additional benefit. Check with your insurance agent or insurance carrier to see what types of options are available. Understand there is usually an additional fee added to the total cost of the premium for most policy riders.
For any reason you would choose to cancel your policy, your coverage ends and you don’t get any benefit or premiums back. You might get a partial refund on premiums if you’ve already paid for future months of coverage in advance. The only other way to get a traditional term life insurance cancellation refund is to cancel during your policy’s free look period, which is usually up to 30 days from when your coverage began. Your policy will state the exact length of your free look period. Make sure to read the fine print.
All term life insurance policies eventually expire, based on the term limit. Because your financial needs are different as you age, this is an opportunity to switch to a policy or coverage amount suitable to your current needs. While you technically are unable to continue your term policy, you can convert your term policy into a permanent insurance policy or buy a new term policy.
The continuation phase of term policies past the original term period is very expensive and most often cost prohibitive. Insurance carriers intentionally build rate steep pricing increases to start escalating at the end of the term, beginning at the next new policy year anniversary. It's in your best interest financially to not continue the policy. Just let it expire.
When purchasing a new term policy, choose a coverage amount and term length that fits your current needs (e.g., if you have nine years left on your mortgage, a 10-year policy might make sense). Compare quotes to find the most affordable premiums for your needs.
Here are several types of term life insurance products:
Level term life insurance: Your standard term life insurance policy. Your premiums are the same amount for the life of the policy. This is likely the best policy option — offering the most coverage for the lowest price.
Instant decision life insurance: These policies offer traditional coverage at a competitive price. Instead of a medical exam, the insurer conducts a phone interview and comes to an application decision within days. It will be hard to qualify if you have health issues.
Annual renewable term life insurance: Term life insurance automatically renews year by year. During the first few years of this policy, you’ll typically pay less than you would for other term policies. But the rates increase each year and end up costing you more in the long run. A decent time frame for this type of policy would be no more than ten years. Some versions increase the premium every year, and some start at year five.
Decreasing term life insurance: These policies are not common in the industry anymore, but they are usually a cheaper option for term life insurance. With this policy, you pay the same amount for premiums each year, but the benefit amount decreases each year.
No-medical-exam-term, or Simplified Issue life insurance: Like instant decision life insurance, this application doesn’t require a medical exam. Simplified Issue policies are based on an evaluation of your health through existing medical records. You could get an offer in about a week, or even less.
Group term life insurance: These policies are often subsidized in cost. It’s easy to get but rarely provides enough of a death benefit and if you leave your job, you lose your coverage. In some cases, the employer contract with the insurance carrier may allow employees to keep their policy, but technically the policy is reissued to the employee as an individual insurance policy at a higher premium rate.
Mortgage protection term life insurance: A policy that pays off the remainder of your mortgage directly to your lender if you die. Your loved ones don't get any money. In some cases the policy has a pre-calculated decreasing premium based on the term and life of the mortgage.
Term life insurance can serve as a valuable tool in your overall financial portfolio. Ideally, the length of your term life insurance should match the financial obligation you’re covering. For example, if you're a new parent, you might buy a 20-year policy to cover you until your child no longer relies on you financially. If you have a mortgage, consider the best option for coverage based on the loan period.
You could consider stacking policies to lower the overall cost of insurance. For example, if you have a 15 year note, you could purchase a 10 year term policy at a higher face amount of coverage and a 15 year policy at a lower rate. In ten years your mortgage would be two thirds paid off, and the remainder of the loan would be less. The 10 year policy would expire. Your 15 year policy would still be in effect and cover the amount remaining on the mortgage for less premium cost. Compare the cost of stacking versus a level 15 year term policy at a higher premium rate to cover the loan payoff.
The annual premium, or “rate,” for a term life insurance policy is determined at the time of purchase and set for the duration of the policy. Typically, the premium amount increases on average by about 8% to 10% for every year of age. The reason every year inches up the cost of term life insurance is simple math. Every birthday puts you one year closer to your life expectancy, and you are more expensive to insure as you age.
Term life policies can be incredibly inexpensive when you are in your 20's and 30's. Premium rates increase every year by 5% to 8% in your 40s, and by 9% to 12% each year if you’re over age 50. When you reach your 60's, even term policies can get expensive. In the insurance world, younger beats older every time. As you age, you become more susceptible to risk and health problems.
Here's the bottom line. Because every year of your life can tack more dollars on your life insurance premium, try to buy any policy you’re considering before your next birthday. To ensure you receive the best rates for the coverage you’re seeking, obtain quotes from two or three of the best life insurance companies in the market you can find. And, once you've found a favorable-sounding policy, be careful to buy no more coverage (dollar amount-wise) than you actually need.
As a licensed agent, I can help you put together a life insurance program, including term life, that meets your needs. More information is also available on this website. It's time to come to terms for your protection and peace of mind. Contact me soon for a conversation. Let's work together for your financial program.
