Many of you have significant 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 should look more closely at the benefits, not the insurance price.
One of the primary reasons people buy term life insurance is its meager 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?
Different Strokes for different folks.
Term life insurance comes in several types, with variations within each type. An important thing you must remember for any term life insurance is that 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” (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.” The level term has a fixed premium for a set number of years, after which the premium increases dramatically. This premium period may be five, 10, 15, 20, 25, 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, other factors 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. Other benefits and administrative considerations drive cost.
The most important benefit to look for is “convertibility.” If you suddenly become ill, you will 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 purchasing more insurance without proving you are still healthy (insurable). This is not a feature with many term products, but it could be important, and this option costs money.
What are the fees?
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 for several years, and 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.
Another benefit the lowest cost term life policies may not have is a “waiver of premium.” With a 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 is that buying the “cheapest” policy 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 you plan to keep the insurance and look at its cost over that period. Cheaper may not be better!