Life insurance — if it were free you would surely own unlimited amounts. But it is not free, so you do your best to own as much as you can for the least dollar outlay from a limited budget. Or maybe you “cheat” and don’t own enough (that is a discussion for another day). Enter term life insurance.
In a nutshell, term life insurance is like “renting” a death benefit, or more euphemistically, a “face amount,” for a fixed period of time. Indeed some say, rightly so, that term life insurance is for temporary needs, whereas whole/universal life insurance is for permanent financial needs. Term comes in various packages but it is most commonly expressed as the period of time the premium for the policy is fixed, level and guaranteed, such as, 10-year term or 20-year term. In other words, a 20-year term for $1 million retains a fixed premium for each of the first 20-years of the policy after which the premium skyrockets while also increasing annually thereafter. The death benefit remains level at $1 million.
What attracts buyers to term life insurance is the low premiums compared to whole life/universal life. For example, a $1 million 20-year term policy for a 35-year old male in excellent health could cost as low as $449 annually. Rates for females are even less expensive (about a 4-year age reduction compared to a male). Even at older ages, term life insurance can be attractive. For instance, a male 55 years old could pay $2,855 for the same $1 million, 20-year term coverage. Term premium guarantees can even go as long as 30-years depending on the age at issue.
Below are tips when looking to purchase term life insurance for yourself or your spouse.
Kenneth W. Rudzinski
Vary the face amounts based on the various needs being covered. Suppose by calculation you need $2 million of death benefits. You, like many buyers and brokers as well, think you should purchase one $2 million policy. This may or may not be true. A father or mother with young children may need only 20-year term for some of the face amount, or until the kids are grown and gone, and maybe 30-year term for continued spousal income. It may be better planning to purchase, for example, $1 million of the $2 million need as 20-year term to cover education and mortgage payoff needs plus extra family income needs, and add $1 million of 30-year term for the spouse. Think about splitting the face amounts in order to cover the length of the temporary need and maybe a little longer to be safe.
Make absolutely sure you buy term insurance with a conversion benefit. This feature allows you to exchange your term policy for a permanent policy without medical questions. For example, if your 20-year term policy allows for conversion, and in year 15 you are diagnosed with a health condition that might make you uninsurable, you can avoid the huge premium increases at the end of the term guarantee by converting to whole or universal life, including variable life, no questions asked. I needed this valuable benefit when 15 years ago I was diagnosed with type 2 diabetes. Make sure your term policy contains a conversion benefit, and, just as important, that you can convert in all years the term premium guarantee is in effect.
Don’t be satisfied if your initial health review causes you to be rated higher than a standard rate, or at a standard instead of a “preferred” rate. Other carriers might come in with a better rate. Recently I had heart surgeon who applied and received a 100% extra rating. We applied to another carrier and got only a 50% extra rating. Your broker can do this for you. If he or she does not suggest it, then find another broker.
Choosing a carrier
Lastly, no one company fits all. Some are better at 10-year term, some at 20-year term. Some companies are better for females than males. Height/weight issues may be especially challenging and what is okay for one carrier may be problematic for another. Make sure your broker can scan the entire term marketplace for you, and has no bias as to what carriers he or she can bring to the table for you.
Finally, recognize that your life insurance death benefit is not a “bonus” to your family if you die prematurely. It is meant to replace your lifetime of lost earnings plus provide for your children’s education as well as retire debts. As a result, you may need large amounts of death benefit, but remember, term insurance is relatively inexpensive so don’t scrimp.