Since term life insurance is basically a commodity the life insurance carriers have had to make it very affordable to compete. The ability to keep it cheap is centered around a few factors. One is that the insurance companies rarely ever pay a death claim on a term policy. Typically, less than two percent of people with term policies ever make a claim. Since so few people actually die, it is a big money maker for the life insurance company. It is a win for the consumer because they were able to get a good amount of coverage for a very reasonable price.
The other big factor in keeping the premiums down is that fact that life expectancy has increased. People are living longer and that contributes to being able to offer reasonable rates to an aging population. Over the last few years rates have come down to the lowest they have ever been. In the last couple years, we have seen some companies have modest price increases due to their overall portfolio taking a hit financially. To make up for their losses elsewhere they had to charge a little bit more for life coverage.
Another main reason, that rates are so cheap is the amount of competition. With so many carriers offering life insurance at competitive rates, it is imperative to be in that ballpark to be successful selling term. Some carriers are not trying to compete with their term products as their focus might be on high quality permanent plans.
When looking at what type of life insurance to buy, it is important to marry affordable life insurance with the product that makes sense for your situation. For example, if you have a child that is 1 years old and you decide you need coverage for 20 years, don’t buy a 10 year term. The temptation to do that might be there, to save cost, but in the end it may hurt you. If you go and apply for a new 10 year term at the end of the first 10 year term, you may not be insurable and certainly the premium will be a lot higher.
The first thing we want to look at is how long will you want and need the coverage. You may want to have permanent insurance, but your budget will not allow for that. Maybe you can do a combination of term and permanent to meet your budget and your permanent need and want. It is important to buy the right amount of death benefit above all else. One case recently, the client wanted to buy 100,000 dollars of whole life, when the need for death benefit was closer to 500,000. We suggested supplementing the whole life with a 400,000 term rider to cover the additional exposure and the client agreed to that strategy. Very often we will see a client with a plan that is not budget friendly and the plan type makes no sense. As an independent brokerage we can shop all the carriers and all the different products. If a consumer is dealing with a captive agent, they may get stuck with one of the products in the agents limited repertoire.
Getting life insurance is a fairly simple and straight forward process. The first thing you will want to determine in getting life insurance is the amount of life insurance that you want to buy. The second thing to determine is the type of life insurance that you want to buy. Do you want to buy term, whole life, return of premium term, universal life or some combination of those? Based on the purpose of the insurance and your budget, that should help in the selection of the appropriate type. For example, if you want to accumulate money as a supplemental retirement benefit, then you will obviously be using either whole life or universal life.
After determining what you want to buy, you need to select the carrier that will provide you the best option. The best option will depend on your criteria. If you want the cheapest term, than we shop the rates and select the cheapest term carrier. If you are looking at whole life insurance, then you want to look at companies that have are good dividend paying whole life carriers.
Now you have picked your face amount, product, and the carrier you want to apply with. It is time to fill out the application for that coverage. Once the application is completed a paramedical exam will be ordered. The paramedical exam is scheduled and can be completed at your home or business. After the application and the paramed are completed, you can expect about 4-6 weeks of underwriting to get approval. At the end of the underwriting process, the company will either approve you and assign an insurance rating or they will decline coverage. The insurance rating will determine the premium you pay for that policy. An example of an insurance rating would be preferred non-smoker.
What is affordable life insurance? It is life insurance that you can afford to pay every month to keep it in force. I think it is important to calculate the appropriate amount of coverage you should have and work from there. I would rather have you buy all term life if it would allow you to get the appropriate amount of face amount. For example, we do an analysis and it determines that you should own 750,000 of life insurance on your own life. The whole life cost will be too expensive and you would only be able to afford about 300,000 of that type. On the flip side, you can get 750,000 of term and that fits in the budget fine. Obviously, it makes sense to cover the need, before you figure out what type of insurance you buy.
If we do the analysis and it is determined that you need 750,000, but can only buy 500,000 of term. While the 750,000 was the ideal number, I would rather you have some coverage than none at all. If something is not affordable, than it won’t be long before you will stop paying on it and fall behind. In order to get the most affordable policy on the market search google, it is important to shop it out and compare rates of all the various carriers. While it is important to get a good rate, it is also important to make sure you get a good value. Is the company highly rated and what options does it afford you on the conversion side?
This is a popular way to use affordable life insurance. Mortgage protection is basically a policy that pays a death benefit that will be enough to pay off a person’s mortgage in the event of death. A term life policy will be taken out for the term of the mortgage. A level term or a decreasing term product can be used for this, although a level term is a much better value. Decreasing term has a decreasing benefit, and level term has a level benefit. Once the term product is selected for 10, 15, 20, or even 30 years, that rate is locked in. The great thing about term is that the beneficiary can use the proceeds however they want to. In other words, they can pay off the whole mortgage, continue to make payments, or do something completely separate.
Having a level term policy with the flexibility of the use of proceeds can be very beneficial. This is a single use of insurance that is only factoring in one debt of the consumer. Often times there are other debts that would be left to a beneficiary, college funding goals that might not be reached, lost income, etc that need to be considered. As a single use product, term life can certainly be a perfect fit.
Another type of term product that is being used on a regular basis for mortgage protection is return of premium term. This is a term program that is level for a period of time (the length of the mortgage) and then if the client is still alive at the end of the term they get a full refund of premiums paid. The downside to this product is that it is more expensive than a regular term, but guarantees the money back.
Do you feel it is going to be a drag applying for life insurance? Do you dread the process?
It is not nearly as bad as you might think. Here are the basics of getting the life insurance process going.
1. How much life insurance should I buy?
2. What type of life insurance should I buy? Term, whole Life, or universal life?
3. What plans are available? Best rates and best companies.
4. Apply for the selected plan.
5. Take the paramedical exam
Once you have done these five things it is just a matter of waiting for the insurance company to come back with your insurance rating and approval. Obviously, not everyone is going to be thrilled about their underwriting rating and it is important to have a good agent who can shop it for you if necessary. On top of that, not everyone is going to get approved. If you have serious health problems, you could be declined for coverage. Your options at the point are reduced and your options are applying with another company that might be more aggressive or use a guaranteed issue company like www.presidentiallife.com. Guarantee issue policies allow just about anyone to get life insurance, but the premium is much higher than a non-guarantee issue product.
In terms of determining the amount you should buy, type of life insurance, and the best plan it is important to have a good agent. We work with our clients to help them determine those answers. They are not intuitive things and it helps to have someone who is plugged in and knowledgeable to help you make such an important purchase.
Is return of premium term life insurance a ripoff or is it a great deal? That is a great question and it certainly can be argued both ways. Return of premium is basically term life insurance that is much more expensive than a regular term policy with the same death benefit. Usually the premium runs about 50-100 percent higher than regular term. To collect on the premium return you must live through the entire level term period and then the full premium will be returned. It seems like a great deal. It is a great deal, but you must consider a few factors in how good a deal it is. If you don’t keep the policy for the full term and drop it, you dramatically overpaid for the term insurance. If you are over 50 the amount you over pay for the term is not nearly as attractive as when you are younger. The argument against it is that the money returned to you at the end earned no interest and the insurance company held onto your money the whole time and made the spread.
I think overall it is a good deal, since so few death benefits are ever paid on regular term life insurance. It is important to try and buy the level term period that you are committed to paying for the whole term. Many of the return of premium plans pay back a percentage of the money paid after a certain number of years. You may want to look at permanent plans up against the return of premium and compare after 10 and 20 years.
When talking to clients it is always important to assess what they need life insurance for. They will tell us they need life insurance for everything from income replacement, mortgage protection, burial expenses, to supplemental retirement income. It is important to assess to make sure that they meet their most important needs with the insurance they have. Ideally, we would like them to meet every need that they have, but sometimes this is not realistic. For example, they only have 100 dollars a month budgeted for life insurance and can only cover income replacement, mortgage protection, college education protection, and burial expenses. They don’t have enough money allocated at this point to do anything other than term life insurance and create supplemental retirement income. This is a great outcome though, as we were able to protect all of their main liabilities. The protection is the most important thing here. Term is a great option for a modest budget as it allows the most protection immediately for the smallest amount of money.
For a single client, they may feel they need life insurance for a totally different reason. For example, they are thinking more in terms of accumulating money and less about death benefit. They do believe one day they will want the death benefit when they have a family. For the client to buy a permanent life insurance policy (whole life, or universal life) at this point and overfund it, can be a great idea. They can grow the money within the policy tax deferred and access money along the way with no penalty and tax-free. It is an opportunity to create another pool of money that can be used for retirement, that has better tax treatment than a 401k.
There are several riders that you can typically add to your life insurance policy. Most of them have a small monthly fee associated with them and some are more worthwhile than others.
Waiver of Premium-This is a very valuable rider and highly recommended if you can afford a few dollars more a month. This rider waives the premium for the primary insured if they were to become totally disabled.
Children’s Insurance Benefit Rider- This provides term coverage for all children of the insured including stepchildren, adopted children, and natural children. Usually the rider is convertible to permanent life insurance for the individual children with no proof of insurability. This is a good rider, but not a necessity. Often it can save on other policy fees.
Critical Illness Accelerated Benefit Rider- This rider is great and usually is included for free with life insurance policies. It pays a benefit amount that usually has a cap to the insured and their family if they become diagnosed with a critical illness. This can really come in handy as the medical costs can be catastrophic to a family dealing with a terminal illness. Of course the insurance company has strict language on this and how it pays.
Additional Insured- This is different than the Children’s rider as it allows the primary insured to add an additional insured to the policy. Usually the rider must be for the same term as the primary insured’s term and for no more than their face amount. This rider typically will cost more than a straight term policy on that person. It is easier though.
This is an expression commonly heard in the life insurance business. Buy term and invest the difference refers to buying term life insurance and investing the difference in something like mutual funds. The difference is between the cost of the term premium and the permanent insurance premium (whole life or universal life).
Would you get a better return on your money by putting that money in a separate account that grows at 15% annually than have the money grow tax deferred inside the life policy? It depends on a few things, including your tax rate, liquidity, and how much you value the permanent death benefit to your family. If you are netting a 15% return is it simple interest that you pay yearly or is it compound interest in a tax deferred account? Tax deferral can be great, but it also leads to compound tax down the road. Is the place you are investing the difference a liquid fund or is it locked up with early withdrawal penalties? Does a death benefit that goes away at a certain age because it is term, provide a lost opportunity cost to your family? What if you have don’t make 15% and actually lose on average 15%?
There is no one answer to this question and both strategies can work very well. What we often find is that people buy term and say they are going to invest the difference but don’t. It is important to save one way or another, so we encourage our clients to adopt a strategy that truly involves savings.