- What’s the easiest solution for life insurance?
- July 17, 2013
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.
About Tony Steuer
Noted insurance author Tony Steuer has spent over 25 years in the life insurance industry. Steuer’s leadership roles include serving on the California Department of Insurance Curriculum board and the National Financial Educator's Council Curriculum Advisory Panel as well as having served as President of the San Francisco Chapter of the American Society of CLU & ChFC, President of the leading Life Insurance Producers of Northern California, and as a board member of the San Francisco Life Underwriters Association. Mr. Steuer is the author of Questions and Answers on Life Insurance: The Life Insurance Toolbook, The Questions and Answers on Life Insurance Workbook and The Questions and Answers on Disability Insurance Workbook - the first two were awarded the “Excellence in Financial Literacy (EIFLE) Award from the Institute of Financial Literacy. Steuer holds a Chartered Life Underwriter (CLU) designation and also holds the Life and Disability Insurance Analyst License, a designation that is held by less than thirty people in California.
Questions & Answers on Life Insurance by Tony Steuer, CLU, LA, CPFFE is licensed under a Creative Commons Attribution 3.0 Unported License.