Buying term life insurance is like renting your life insurance. It is very similar to getting a lease that you pay a flat rate for a period of time. You could have a 1 year lease or a 5 year lease. Life insurance companies have created different length level terms. The most popular are 10 year term, 15 year term, 20 year term, and 30 year term.
This is the most cost effective way to get coverage for a period of time. At the end of the level term period, the rate goes up very aggressively, similar to rent. Most term policyholders will drop their term when the rate goes up on the policy. Often times we will recommend some type of blend of term and permanent life insurance. When the level term period is over and the policy is dropped, then the client still has the permanent part of their insurance still in place. This approach can be a very good one as the term can cover much of the exposure during prime working years and the permanent can function as a smaller amount that will be in force after the term disappears. Many clients say, “I won’t need insurance at that point when the term ends”, but few know how they will feel at that point. Having some form of permanent at least gives you that option. If for some reason you truly don’t want the permanent plan at the end of the term, you can just cash in the cash value and walk away with that money. Often times, that can be as much or more than you put into the policy. If you want to get life insurance, there are a lot of companies competing for your business right now, so its a great time to apply.
When buying term life insurance there are several things to consider. For example, what length level term do you want to buy. They offer 1 year annual renewable term, 5 year term, 10 year term, 15 year term, 20 year term, and even 30 year term. On top of that, many of the company’s offer a return of premium option. This option will return all of your premiums to you, if you outlive the term. I recommend to our clients that they have the term run at least through the years of highest need for their families. In other words, until there kids are at least 18 and preferably through college.
The term length is important, because at the end of the term the insurance cost will probably go through the ceiling and be cost prohibitive. Another thing to keep your eye on with insurance is your insurance age. Most life insurance companies, recognize you as one year older when you get within six months of your birthday. For example, if you are turning 43 on July 11th, you want the policy to be dated no later than January 10th to be considered 42. The other option to save your age is backdating the policy. This can be a good option, but you must catch up on the back premiums. Talk to your agent about this.
Make sure to put your policy in a safe place. It is a shame, but many life insurance policies go unclaimed. Either the policyholder lost the policy or never let his/her family know that he had a policy. Of course the insurance company is ok if the beneficiary doesn’t come forward. That simply means that they don’t have to pay out the benefit. They will not seek you out. This is a good reason to have an agent that services your account and advises you on your insurance needs.
When looking for a policy look at the financial ratings of the companies. Make sure the company you buy from has at least an A rating. It is easy to get caught up on just the rate and ignore the strength of the company. With today’s financial insecurity, make sure you consider this in your decision.
We speak to a lot of clients who are looking for mortgage protection life insurance. Basically, this is life insurance that would provide enough money to the beneficiary to pay of the deceased’s mortgage. Many of the programs out there will offer life insurance with a decreasing benefit to go along with the decreasing mortgage amount. We recommend staying away from these products as the cost doesn’t go down, but your benefit does. To cover this type of single issue you have many different options with life insurance products.
Example 1: You just bought a house with $250,000 mortgage and the term is 30 years. You can take out a straight 30 year level term that will run out when you presumably payoff the mortgage in 30 years. Obviously, few people know where they will be in 30 years, let alone in the same house. Any way you slice it, you will at least have protection for your heirs of $250,000 for a full 30 years. In year 31, the term premium will skyrocket and most people will drop it.
Example 2: Return of Premium (ROP) is a very popular product these days for mortgage protection. Just take the same $250,000 mortgage with a 30 year term, and buy a 30 year ROP. This product will return all of the premium to the policyholder if they are still alive at the end of the term. Usually, these rates are higher than an average term policy, because of the premium return aspect.
Example 3: Some clients will use a permanent policy such as a Universal Life and fund it guaranteed to age 100. This will last the whole term and provide them with a death benefit that should last their whole life time. This is more expensive initially than the ROP and the straight 30 year term, but looks very appealing in year 31 when the policy premium is still the same.
Money back term life insurance is concept that has been created by the insurance company’s to refund the customer the term premiums at the end of the term. This has been a very hot product (ROP-Return of Premium). In essence, a customer is buying a term policy that costs about 30-50% more than your average regular term policy. The benefit for paying more is that the premium amount will be returned in full at the end of the term period.
Is this a good deal?
For example, a 1 million dollar, 30 year ROP term policy costs “Bob” $1000 a year in premium. At the end of the term if “Bob” has paid the full time and is still alive he will get a check back from ABC insurance company for $30,000. If he cancels early, typically he would get back only a portion of his premium: usually nothing for the first six years, 9 percent after 10 years and 35 percent after 20 years. At first look, it looks like it makes a lot of sense. If Bob, lives through the 30 years he gets back all the money he ever paid to the insurance company. On the other hand, if he paid a regular term policy for 30 years and was still alive he and his family would get nothing.
The insurance company knows that few people will ever pay for a policy for the full term and that they are going to win in most cases. On top of that, very rarely do they ever pay out a death claim. Bob, might be better off buying the less expensive term (for say $600 a year) and investing the difference ($400) in to an interest bearing account. This only would work if Bob made sure he remembered to truly save this amount every month and put it aside. Bob, may want to compare Universal life guaranteed to 100 as another option. It would cost more than the ROP and regular term, but it would guarantee a death benefit for his family. The chances he lives past 65 are very high.
ROP can be a great option to look at and it is a very popular life insurance product right now.
