If you’re in the market for term life insurance, your agent might suggest purchasing a guaranteed rate term life insurance policy. With this type of policy, the premiums would remain level for a certain length of time such as 10, 15, 20, 15 or even 30 years. A wide choice of initial rate guarantee periods is one reason why term life is so popular these days.
Another reason is that term life prices are now at or near all-time lows.
Most agents suggest a rate guarantee that matches the length of time the policyholder thinks they’ll need coverage.
For example, if you need life insurance for 20 years to see your kids through college, then an insurance agent might suggest a 20-year initial rate guarantee because the policy will yield the net lowest cost over the 20-year period on a guaranteed basis.
If you have a 10-year need for, say, a bank loan, then choose the 10-year rate guarantee. Many people with an outstanding mortgage debt like to make certain that their term life policy has enough death benefit to pay off the mortgage.
“If there is any chance a need will last longer than 10 years and the insured wants or needs to use term life, I would always suggest using a 15- or 20-year level premium guarantee plan,” said Brian Ashe, president of Brian Ashe and Associates, Ltd. located in Lisle, Ill.
But be warned: if a policyholder wants to extend coverage beyond the rate guarantee period they would pay far more to keep it in force, so it pays to buy a longer initial rate guarantee period up front.
“If they go just one year beyond the initial 10-year guarantee period, in year 11 they can pay anywhere, on average, from about 75 percent to 125 percent or more of all the premiums they paid in the prior ten years, in just year 11, and every year thereafter, the premium will go up,” said Ashe.
Insurance experts say policyholders often choose a term life insurance policy with a 20-year level premium.
“Better pay a little more now and know that rates will not change for 15-20 years,” said Ashe. “And, if they really don’t need it anymore, they can simply drop it. There is no requirement that they have to keep paying for the 15-20 year guarantee plan if they don’t need it.”
Many companies offer a policy that has guaranteed level premiums for life. This means that your premiums will never rise during the lifetime of the policy.
You also might want to consider purchasing a Term-UL policy. Life insurers introduced the “Term-UL” policy to the public several years ago. The Term-UL is a relatively new hybrid insurance product that acts like a term life policy but is considered as a universal life product. Rates on a Term-UL policy remain fixed until the end of the guaranteed period, and once the period ends, the rates start to increase. Like traditional term life insurance, you can choose a term of 10, 15, 20 or 30 years.
Rather than purchasing a term policy and using it to convert into a whole life insurance product later, the Term-UL is a combination of both products in which the convertibility feature is already built in.
This means you can extend coverage later without having to show proof of insurability. These policies are priced lower than traditional term and whole life insurance policies but carry substantially lower cash values. The Term-UL offers the flexibility of converting the policy into another type of whole life insurance product just by paying more money into it.
For more about guaranteed rate life insurance, click here.