Many of you have large life insurance needs and not-so-large life insurance
premium budgets. We can usually meet your insurance needs at a price you
can afford by using term life insurance rather than a cash value product.
One of the primary reasons people buy term life insurance is its extremely
low cost. But costs can be deceiving—what seems like a great deal at first
isn’t such a bargain when you look more closely. Why is this so?
Term life insurance comes in several types and there are variations within
each type. An important thing you need to remember for any term life insurance—if
you miss a payment, your insurance is gone. You may be able to get it
reinstated, but don’t count on it.
The least expensive form is often “Annual Renewable Term” (called ART).
ART is so cheap because the premiums rise each year. With ART, what was
a bargain initially quickly becomes a burden.
A more expensive (at least initially), but more predictable form is called
“Level Term.” Level term has a fixed premium for a set number of years,
after which the premium increases dramatically. This level premium period
may be five, 10, 15, 20, 25, or 30 years, or even longer. In some cases
the premium is level for five years, then rises, then stays the same for another
five years, and so forth.
While cost is an important issue, there are other factors that are even more
important. In reality, the cost per $1,000 of term life insurance for
you is not much different from one company to another, assuming a similar product
structure. Cost is actually driven by other benefits and administrative
The most important benefit to look for is “convertibility.” If you suddenly
become very ill, you are going to want to keep your current life insurance.
Convertible term life lets you do that. Your premium will be much higher
because if you convert you will own a cash value permanent policy, but knowing
the insurance is there is worth it. Don’t buy a policy without this benefit.
Another important benefit is the ability to purchase more insurance without
proving you are still healthy (insurable). This is not a feature with
many term products, but it could be an important one, and this option costs
Policy fees also affect the cost of your term life insurance. Rather
than have a lot of seemingly inexpensive policies, you may be better off combining
them into one larger policy to reduce these fees.
Some policies offer a return of premium option—after a number of years you
get all the money you paid back. This is very expensive, but if it makes
you feel better about spending the money in the first place, consider it worthwhile.
One other benefit that the lowest cost term life policies may not have is “waiver
of premium.” With waiver of premium, if you become disabled you will not
have to pay any premiums during this time. This can be a valuable benefit.
The bottom line—if you buy the “cheapest” policy, it may cost you. You
may not be able to convert it, the premiums may rise each year, you may be paying
lots in policy fees, and you may have to keep paying even if you are disabled.
Know the features you need and the time frame for which you plan to keep the
insurance, and look at its cost over that entire period. Cheaper may not