Term Life Insurance

• One of the biggest advantages of term insurance is its lower initial cost in comparison to permanent insurance.
• Why is it cheaper when initially purchased?
  • Because with term insurance, you’re generally just paying for the death benefit, the lump sum payment your beneficiaries will receive if you die within the term of the policy.
  • Term insurance is often a good choice for people in their family-formation years, especially if they’re on a tight budget, because it allows them to buy high levels of coverage when the need for protection is often greatest.
• Term insurance is also a good option for covering needs that will disappear in time.
  • For instance, if paying for college is a major financial concern but you’re pretty sure that you won’t need life insurance coverage after the kids graduate, then it might make sense to buy a term policy that’ll get you through the college years.

But what happens if you buy a term policy only to realize at the end of the term that you still have a need for life insurance?

• Well, it’s sort of a good news, bad news story. The good news is that all policies will give you the option to convert (exchange your term policy for a permanent one), so if something has changed with your health you don’t have to worry about re-qualifying.  The bad news is that your new policy will have much higher costs since the permanent policy you are converting to now lasts for much longer than the term and your current older age is another key factor in determining the cost. (See more in the Convertibility section below)
• If you’re still in good health with healthy living habits, you may be able to re-qualify for a new term or permanent policy at a reasonable rate. But if your health has deteriorated, you may find that it’s too expensive to apply for a new policy or you may not even re-qualify.

While all term insurance provides a level death benefit to your beneficiary when you die, in the term period, there are a few different types of term insurance that you should be aware of.

• Traditional term, as you have learned provides a death benefit for a period of time. In order to qualify for this plan, you will need to go through full underwriting.  Simply put you will need to be examined (blood draw, urine sample, height/weight check, medical questions, blood pressure, etc.) and depending on your health history they may require reviewing your medical records.  This is the lowest cost term option.

• Simplified Issue Term – as the name suggests this type of term policy offers a simplified method of medical qualification. The good news is that there is NO paramed exam or medical records review with this type of plan, which also means that the time it takes from when you apply to having your policy is much faster.  The bad news is that the increase in convenience, and speed of processing time, comes at a cost.  All simplified issue term policies are more expensive than their fully underwritten cousins.

• New Accelerated Underwritten term – In the last few years’ carriers have begun to make updates to their underwriting processes for traditional level term. For many traditional term carriers, if your health is good, and the death benefit you are looking to purchase is within a specific range, you would not be required to have a paramed exam, and your policy may be process with what they are calling accelerated underwriting.

• Return of Premium Term – this is a unique traditionally underwritten term insurance option. While term insurance is very inexpensive, one of the disadvantages is that you are only paying for the death benefit.  Less than 2% of all term policies will payout a death benefit, so at the end of your term period where does that leave you?  With return of premium term, as the name suggests, if you reach the end of the term period, you then are provided options.  You can surrender the policy and get 100% of your premiums back, or you can use that “cash value” to help reduce the cost of a new permanent policy.  These types of term policies are significantly more expensive than traditional term, but the plus side of getting all of your money back, may outweigh the cost.

Another provision that is very important is something called convertibility. Some insurance contracts only allow “conversion” in the first few years of the policy, while others allow it at any point during the term. This valuable feature allows you to convert your term policy to a permanent policy (e.g., whole life insurance, Universal Life Insurance) without submitting evidence of insurability (insurance jargon for updated health information, medical records, etc.). Being able to convert to a permanent policy is a great option to have in the event that circumstances in your life change such as failing health or maybe just the realization that coverage is needed for a longer period of time than you originally anticipated. That’s why when purchasing a term policy, it’s never a bad idea to find out what kind of permanent policies are offered by the company you are considering. Some companies may only have strong term insurance offerings, while others may have very competitive products in both categories.

So if you’re considering a term policy, make sure you carefully consider how long you’ll need the coverage. If you’re pretty sure that your needs are temporary, then term insurance is probably the right choice for you. But if you think there’s a possibility that you might need the coverage for a long time, then remember that if you want to renew your term policy after it expires or buy a new term policy at that time, your age, health status or other factors may make coverage very expensive.  To better understand term insurance, consider this analogy. When you purchase term insurance, it’s sort of like renting a house. When you rent, you get the full and immediate use of the house and all that goes with it, but only for as long as you continue paying rent. As soon as your lease expires, you must leave. Even if you rented the house for 30 years, you have no “equity” or value that belongs to you.