Being human, we crave simplicity because it is, well, simpler that way. Term life insurance is frequently categorized as a simple solution for life insurance.
It is commonly used among people who are not interested or don’t have the time to learn the intricacies of various life insurance policies, but still need protection.
With term, it is easy for it to be the right answer since term insurance is perfectly adequate in the majority of situations.
So, with that being said, how does one evaluate the various term policies available in the marketplace while monitoring existing term policies?
In fact, there is a vast range of resource materials one can use to compare the costs of different life insurance policies, especially term life insurance. It is a fairly simple process, as long as you are comparing different policies offering identical coverage.
For example, compare the cost of a 10-year level premium term policy only to another 10-year level premium term, not to a 5-year term or decreasing term policy.
The term period is the number of years that premiums remains level until the policy expires or is up for renewal for another term: currently either 1, 5, 10, 15, 20, 25, or 30 years.
With term life insurance, the policy with the lowest cost is the one with the lowest premium.
The challenge comes when you are comparing dissimilar term policies, such as comparing an Annual Renewable Term Policy with a Guaranteed Level Premium Term.
Then you have the variations among level premium term policies with different guaranteed periods (e.g., 5 years, 10 years, 15 years, etc.), and you have to use your best judgment in determining whether you wish to compare guaranteed or projected rates.
An informed comparison should consider any differences in company ratings from the insurance rating agencies (e.g., A.M. Best, Standard & Poor’s, Fitch and Moody’s) as well as such intangibles; like how well each company has treated policy owners in the past.
It is also helpful to keep in mind that competition for term business has been aggressive in intensity for a number of years, and company actuaries have been aggressively pricing their policies to attract new business, anticipating favorable long-term mortality experience.
This premium rate cutting may work out or it may turn out, in retrospect, to have been overly aggressive. In other words, there is no way to know what will happen in the future.
Factors to take into consideration:
-How many years the premium is guaranteed?
-Strength of the company, as measured by the insurance rating agencies “convertibility”. (Option to exchange without evidence of insurability, as the same rate class, to a permanent/cash value policy).
-Length of time convertibility option may be exercised.
-Products available for conversion. (Some companies give you a number of choices, while some limit you to one policy that is typically not a good value compared to other available policies.)
-Disability options, if any.
-Conversion credit (i.e., reduction in first-year premium as an incentive to convert to permanent insurance)
-Extra cost riders available such as: Disability waiver, Return of Premium, Family Rider, Accidental Death Benefit, Guaranteed Insurability Option, Child Rider, and Terminal Illness Rider.
If you need any additional information, please email me at email@example.com.
By Tony Steuer, CLU, LA, CPFFE
Tony Steuer is an author and advocate for financial preparedness. Tony Steuer, CLU, LA, CPFFE, helps people make sense of the financial world in a way that’s easy for them to understand. His books including, “GET READY!,” “Insurance Made Easy,” and “Questions and Answers on Life Insurance,” have won numerous awards. Tony is the founder of the GET READY! Initiative which includes the GET READY! financial organization system, the GET READY! Financial Preparedness Club, GET READY! Podcast, and the GET READY! Financial Principles, a best practices playbook for the financial services industry. Tony served as long-term member of the California Department of Insurance Curriculum Board. Tony is regularly featured in the media including the New York Times, the Washington Post, Fast Company, and other media. He has also appeared as a guest on television shows, such as ABC’s “Seven on Your Side.” Visit https://tonysteuer.com/ to join the GET READY! Financial Preparedness Club and access free resources.