What is Term Life Insurance?

February 10, 2017 4:46 pm Published by

Imagine you were sitting down at a nice dinner party with some friends and some new friends and the conversation turned to the future. Now, no one likes to openly discuss money, but investments? Sure, I know friends of mine who don’t work in the investment and insurance industry who talk about where they’re putting their money all the time. 

Now imagine that someone at the party asked you what sort of life insurance you owned. What would you tell them?

First off, it’s important to let them know there are two main types of life insurance, term insurance and permanent insurance. Watch their eyes light up! Then you’d tell them that you have term insurance through a group investment plan with your employer, or you might tell them you own an individual plan, in which case you could own term or permanent insurance.

The Majority of People Own Term Insurance

Why do people own term insurance? Well, term is what I like to call rental insurance.  It costs very little each month for the amount of life insurance coverage you want. This is really helpful for young families with kids, mortgages, and organized (alright, tight) budgets that need life insurance protection. 

Term insurance is also generally renewable for new terms without need for a new medical exams. Term insurance is important in the event you need life insurance coverage and you contract a medical condition that could prevent you from getting life insurance in the future. You won’t lose your term insurance.

The catch?  As you get older and a term expires, the premium costs go up. In some cases, quite significantly. Costs can rise so much that some may choose to no longer carry some or all of their coverage. This suits the insurer just fine as they get to keep your premiums that have already been paid and they don’t have to pay you or your dependents a death benefit. Hence the rental concept.

 

How Can You Prevent Cost Escalation?

So, how do you buy a term insurance policy that comes with escalating premiums that become too expensive?

Here are a few suggestions:

1. Pick a higher Term!

  • Term insurance is typically sold in 10 year terms, but it’s also generally available in 20 year terms or Term to 65 (which means all years between your current age and age 65). The longer the term you select, the higher your premium becomes – but the premium will not change during the entire term. Most people choose 10 year term (as its the cheapest). So what would you choose between:
  • Paying $60/month for a 10 year Term and then $250/mo for the next 10 years on renewal, or
  • Paying $90/month for a 20 year Term
  • The answer? It depends! If you only need the insurance for 10 years, choose Term 10. But if you need the insurance for more than 10 years – the $250/mo renewal is really expensive. Any life insurance need beyond 12 years and you’d be better off having bought Term 20!

2. Get a Medical!

  • Stuck with a higher premium Term 10 that has renewed? Try to get a new cheaper Term 10 by re-doing your application and medical underwriting. If you are medically fit, you will likely get a much cheaper newly issued Term 10 rather than accepting the renewal rate of the previously issued Term 10 plan.

 3. Buy some Permanent Insurance!

  • If you don’t want to pay expensive rent, then own! We talked about the benefits of permanent insurance awhile back, but long story short, with permanent life insurance you or your dependents gains the benefit of this policy as an asset versus those with term life insurance who will only view it as a cost.

Make sense? If you’re interested in term insurance and want to talk more, just give me a call!

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This post was written by Marco Faccone