This article will encourage consumers to purchase level term life insurance products which have level premium periods that match the time period that they need life insurance.
CAUTION: Do not select shorter level term periods planning to buy a new policy at a later time.
This is a common and serious MISTAKE!
Most independent financial experts agree that buying term life insurance can save you money and I agree. But many make the mistake of buying a cheaper policy, like 10 year term, with the notion they will buy a new 10 year policy 10 years later. This may initially save money but that strategy could leave you with insurance premiums that you cannot afford.
WARNING: Factors used to determine if you qualify for lower "preferred health" rates tend to deteriorate as you age.
Many people take their good health for granted. Younger people often find it easy to qualify for preferred health discounts but as you grow older changes in your health can risk your preferred health status. Things that you may think are relatively minor can lead to higher premiums for new policies.
For example, have you noticed all the drug commercials for blood pressure and cholesterol on television? It is not uncommon for people, as they grow older, to develop these problems. Having the problem, or even taking medication to control the problem, can disqualify you from getting the lowest premiums that many companies offer.
If you develop a more serious medical problem it can lead to policy premiums that are increased with medical extra surcharges. Diabetes could easily double the premium a person pays for a new non-preferred policy. If a medical problem is bad enough, you could become what life insurance companies consider uninsurable and you may not be able to buy a new policy.
The point is this, as you grow older adverse changes in your insurability can negatively impact what you pay for a new life insurance policy or may leave you unable to buy life insurance.
A longer level premium period, which costs more, protects your current health status and insurability.
Example: Another thing that life insurance companies look at, to see if you qualify for their lower preferred rates, is your height and weight. MOST companies use the same height/weight tables for a 25 year old as they use for a 60 year old. People naturally tend to put on more weight with age and so most will tend to fall from a preferred health status to a more expensive standard health status as they grow older.
IMPORTANT: When you purchase a longer level period policy with a preferred health discount, such as a 30 year term policy, your preferred status is guaranteed and does not change during the 30 years. If you put on weight during the 30 year level term period your premiums will remain unchanged. But if you purchase a cheaper 10 year policy, with the idea of buying another 10 year policy at the end of 10 years, all health factors including your weight will be re-examined. An adverse change could dramatically affect what you pay for a new policy.
Lock in your preferred status longer - buy a longer level period term.
This article will give you examples of the premiums you may encounter if you make the mistake of not buying longer level premium term life insurance. It will help you see the impact that a change in your health could have on future premium costs.
Consumers will correctly conclude, as a result of this article, that those who need term life insurance longer than 10 years need to look carefully at longer level term products such as 20 and 30 year level premium term insurance.
This article is written by Bob Barney, president of COMPULIFE Software, Inc.
COMPULIFE is the company which owns and operates www.term4sale.ca.
The www.term4sale.ca web site provides consumers with independent pricing information about term life products available in the market. The most unbiased term insurance comparisons on the web are found at TERM4SALE because neither COMPULIFE nor TERM4SALE sell life insurance.
Why does COMPULIFE provide this FREE service?
COMPULIFE benefits indirectly from the site in that many of COMPULIFE's customers, who are agents, are listed at the web site. Many of those listed agents sell life insurance to consumers who have found the agent's name at the www.term4sale.ca site. The opportunity to sell life insurance to the public as a result of www.term4sale.ca increases agent demand for the COMPULIFE program. COMPULIFE sells that program to insurance agents for $180 per year.
COMPULIFE believes that consumers are well served when they buy term life insurance from agents who actively and routinely shop the market.
Why Buy Term Life Insurance?
Some explain that term insurance is for "short term" needs while whole life insurance is for "long term" life insurance needs. That distinction is confusing.
It is much clearer to say that whole life insurance is for problems that will exist for as long as you live. These are problems that occur "when" you die, not "if" you die. For life long problems whole life insurance can make sense because "whole life" is an insurance policy that covers you for the "whole" of your "life".
Term insurance should be used for life insurance needs that do not exist for the whole of your life.
For example, the most important reason anyone should buy life insurance is to take care of their dependent children if they die. This particular need for life insurance is not a lifetime insurance need. Eventually children grow up and become financially independent. No one needs whole life insurance to address this need.
The second most important reason to have life insurance is to provide for a financially dependent spouse. By contrast to the need represented by dependent children, this need can persist through middle age. The prospect of a reduced lifestyle with the loss of a spouse's income makes it desirable for most middle aged couples to continue carrying insurance. While providing protection for your spouse is a need that can continue beyond the point of raising children, even this is not a lifetime problem.
Retirement is the Turning Point
If you live to age 65 or older you likely plan to retire and stop working. In retirement you do not earn an income - you use your retirement savings to generate an income. If you die your spouse should inherit those retirement savings and the income that they generate. In a sense the surviving spouse is financially ahead because there is now only one person to feed instead of two.
NOTE: There are other factors that can alter a survivor's retirement income. Some pensions may not continue to a surviving spouse or the pension(s) may be dramatically reduced. While no one should voluntarily put their spouse in that position, when planning retirement income, some pension programs do not offer options that provide adequate income to a surviving spouse. If you are in that situation, whole life insurance may be a good way to address the problem. When you die, and your pension ends or is reduced, the whole life death benefit can give your spouse the cash to make up for the pension reduction.
IMPORTANT: Financial independence through investment should be a significant priority. No one should plan to retire until that happens. Because financial independence for you and your spouse is also financial independence for the surviving spouse, the need for life insurance ends when you achieve financial independence.
If you do not achieve financial independence before you retire, whole life insurance is not a solution - it is a problem. Apart from not being able to afford to pay the premiums in your retirement, you will need to quit the policy to get at the cash that's in it. A whole life policy that is terminated early (before death) is a policy that failed in its primary mission. The primary mission of whole life insurance is to provide insurance protection for the "whole" of your "life" so that when you die your beneficiary gets the death benefit. Aborting that mission, and cashing out a whole life policy, turns whole life into what was a very expensive form of term life insurance. That's why cash values are called cash surrender values. Surrender means to give up or quit.
To summarize, most life insurance needs drop to nothing by retirement. While some needs may continue, and while whole life may be an alternative for those lifetime needs, most consumers should purchase term life insurance.
Term to Retire
Level term to the point that you retire is a good strategy. If you buy a long, level premium policy when you are young and have children, then that same amount of insurance coverage is likely to be a good amount for your spouse as your children leave home.
But this begs the question, "If the need for insurance goes down as children leave home, isn't a level face amount going to be more than needed?"
THIS IS IMPORTANT: Inflation causes a level amount of insurance to be worth less over time. Because the need for insurance tends to go down, as your children grow older, and because the value of a level face amount goes down with inflation, keeping the same amount of level term through to retirement makes a lot of sense.
Click Here for a chart showing the impact of inflation on the face amount of a level life insurance policy death benefit. You also need to keep in mind that most people tend to earn more income as they get older. Some of the increase in income is due to inflation but some is due to job advancement. As your spouse and children become used to a higher standard of living, the need to increase your life insurance will occur. Therefore, it is highly unlikely that you will want to reduce your insurance coverage before retirement. It is more likely you will add additional coverage as you move forward.
What happen to a level term policy after the level premium period?
After the level premium period the majority of level term products become Yearly Renewable Term (YRT). For example, if you buy a 10 year level term, in the 11th year the premium will jump dramatically and that's just for the 11th year. In the 12th year the premium will jump again and continue to jump each year after.
The premium increases are enormous and will continue to go up each year. Those premiums kick in right after the initial level premium period.
You can avoid that premium increase in the 11th year by going longer than 10 years when you start. In addition to 10 year level term, today's term market also offers competitive level premium products for 15, 20, 25 and 30 years. A 15 year term takes the big jump in cost in the 16th year. A 30 year policy puts off the big jump until the 31st year. By buying a longer level period you extend the time before you encounter those punishing annual renewal premiums.
To demonstrate how horrible the annually increasing term premiums can become, I have prepared a sample spreadsheet which will permit you to see those premiums. The sample spreadsheet was produced in March 2007 using the www.term4sale.ca web site. The spreadsheet is a feature that you can use at www.term4sale.ca.
Click Here for a spreadsheet showing sample future costs for 5, 10, 15, 20, 25 and 30 year term products. The spreadsheet is for a 35 year old non-smoking male in preferred health. Please print the spreadsheet and have it next to you as you read the balance of this article. I will refer to it a number of times.
NOTE: The sample spreadsheet was produced using www.term4sale.ca. When you use www.term4sale.ca to do your own comparison, you will find after the comparison results an option that says, "Click here for a spreadsheet comparison of the above results". TERM4SALE will give you a spreadsheet of the lowest cost products in your comparison results. When you click for the spreadsheet you will get a side by side comparison of product premiums that will go 10 years longer than the longest level term period in the spreadsheet. The point of the spreadsheet is to warn you about the renewal premiums.
Take a Close Look at the Premiums Through the Years
In reviewing the sample spreadsheet you will note that I included a 5 year term product. The 5 year product demonstrates just how uncompetitive 5 year products have become. In the sample spreadsheet the price of the 5 year product is $340 while the price of 10 year term is only $165, less than half the price. Even if you only needed the insurance for 5 years, it makes sense to save money by buying the 10 year term.
For those who need life insurance for a short time period, the least expensive product you can buy today is 10 year term. The reason for this is relatively simple. Life insurance companies cannot make money on products that consumers only keep for 2 or 3 years. While theoretically those companies could price 1 year or 5 year plans lower than 10 year term, consumers would need to keep the products for close to 10 years before companies really made any money. Remember that life insurance companies encounter significant first year costs in acquiring new life insurance customers.
Looking at the second column of the spreadsheet you will find the premiums for a highly competitive 10 year term product. Notice that the premium is only $165 each year for the first 10 years. Now look carefully at the 11th year. The guaranteed premium in the 11th year leaps to $2,445! That is NOT a misprint - that is the guaranteed premium.
Now imagine that you owned that policy and you learned, during the initial 10 year level period, that you now have a serious medical problem. If no one else is willing to sell you a new policy, and you are forced to continue with this 10 year policy, your premium in year 11 will jump almost 15 times. And the premium increases are not over. The following year $2,445 jumps to $2,635, which jumps to $2,845, etc.
You do not want to get stuck paying those annually increasing premiums.
So what do you do if you need life insurance in the 11th year. Take a look at column 3 where you will see a 15 year policy which has a premium of $250. In the 11th year the premium is still $250 and that continues to the 15th year. Look at the total premiums in the 15th year. The $500,000 15 year policy has a total cost of $3,750 in premiums. By contrast, the 10 year product would have cost $15,655. if you were forced to pay those annually increasing premiums from year 11 to 15. If there is any chance you would need the insurance in the 11th year or longer, can you afford to buy the 10 year policy?
But what if you need insurance in the 16th year. In year 16 the 15 year policy premium jumps from $250 to $2,985 and just like the 10 year policy in year 11, the premiums go up each and every year.
Now take a look at column 4 where you will see a 20 year policy which has a premium of $345. In the 16th year the premium is still $345, and that continues to the 20th year. Look at the total premiums in the 20th year. This $500,000 policy cost you a total of $6,900 in premiums. By contrast, the 10 year product would have cost $35,040, and the 15 year product would have cost $22,995.
But this sample insurance buyer began at age 35. The 20 year level premiums run out at age 55 - likely sooner than the need for life insurance. If the consumer buys the 30 year policy in column 6, the premium is $529 per year, guaranteed to age 65. While that's considerably higher than the initial premium for the 10 year policy, the premium for the 30 year policy remains guaranteed and level until the policy is no longer required at age 65.
The Buy and Buy Again Problem
Some insurance agents will tell you not to worry. Just buy the cheaper 10 year term product and buy another 10 year term product when the first one runs out. Some companies even offer this strategy as a policy option they call "re-entry". The problem with this re-entry logic is that you face all the medical and insurability issues over again. If your health changes you may not get a new 10 year policy for the price you think.
And how much would you save anyway? Is it really worth taking a chance? Using the same health status as we did for the 35 year old, a 45 year old can buy a 10 year policy for $400 and a 55 year old can buy a 10 year policy for $985. Let's compare that with the 20 and 30 year premiums:
|Age||10 + 10 + 10||20 Year||30 year|
But let's take another look. Let's assume that during the first 10 years you gained some weight. We'll assume that you're still insurable but that companies are no longer willing to give you the cheaper preferred rates that were available to you when you were 35. What would a standard health 10 year policy cost at age 45? Instead of a premium of $400 the premium would be $630. And what would a 55 year old pay for a standard health policy? Instead of a premium of $985 the premium would be $1,450. Let's look at the same chart again:
|Age||10 + 10 + 10||20 Year||30 year|
What would happen if you developed a more serious problem than weight gain? What if you became diabetic? The standard premiums could be increased with medical extras. Suddenly you could be looking at premiums that are double standard health.
Is this really a risk worth taking? Remember, if our 35 year old buys the 30 year premium today, the preferred premium of $529 is locked in for a period of 30 years. It cannot be changed by the company. Is $45 per month too much to pay for $500,000 of life insurance?
I remember when grandpa used to say, "when I was your age...". While I hate sounding like grandpa I remember the first 10 year level term policy that I ever purchased. I was 25 years old and the policy was for $100,000. The non-smoking premium was $205 per year guaranteed for 10 years. Compared to the decreasing term that I had been buying before, $205 was a bargain.
Compare that to our 35 year old non-smoker. For $529 per year he can buy $500,000 of 30 year guaranteed coverage. I have to tell you, in the strongest language possible, that it makes absolutely no sense trying to save money buying a 10 year policy. The added risk just isn't worth it. And if our 35 year old buys that 30 year term policy, they can throw the policy in the top drawer and forget about it because the coverage and the premium are guaranteed for 30 years.
What About Conversion?
Despite the points I have made to this point, some agents will tell you to still buy the cheaper 10 year term policy. They will assure you that if anything happens to your health the company will let you convert the term policy to a whole life policy without medical questions.
If that sounds appealing to you, it shouldn't. Think about this: if whole life doesn't make sense for you now, why would it make sense 10 years from now?
Ask the agent to show you a whole life illustration for a person who is 10 years older than you are today. Ask the agent if that is the policy you can convert to if you use the conversion option. Unfortunately the agent can't give that assurance because the conversion option in a term policy makes no reference to any specific whole life policy or premium. The conversion option will say that the company will allow conversion to a whole life policy that they make available at the time of conversion (for conversion), for the premium that they are charging for the policy at that time. There is no guarantee what the policy will be or what the premium will be. Not much of a guarantee is it?
In the case of our 35 year old, you can rest assured that the cheapest possible whole life policy at age 45 would be $3,750 per year. To come up with that premium (which will be much lower than what a conversion policy would offer) I used the premium for the most attractively priced whole life available in the market today. It is quite safe to say the conversion premium would be a lot higher than $3,750 and $3,750 is a heck of a lot more than $529 per year.
To summarize, the ability to convert a policy is an option worth having versus not having it, but I would not rely on it to fix a mistake such as buying a 10 year term product expecting to buy another one in 10 years.
If you know you need term life insurance longer than 10 years, DO NOT BUY 10 YEAR LEVEL TERM. Get a longer level premium period.
COMPULIFE's Challenge To Life Insurance Companies
If there is one problem with the advice given to this point it is that younger insurance buyers do not have long enough level premium term policies available to them. There is no excuse for this, it's simply a gap that life insurance companies need to address.
In this regard COMPULIFE has issued a challenge to the life insurance industry. COMPULIFE will be publicly campaigning to get the insurance industry to respond to this challenge. The challenge is for life companies to introduce new level term products that provide coverage and premium guarantees to ages 65, 70 or 75.
COMPULIFE is calling this product concept "Term to Retire".
Life companies CAN do this - the question is WILL life companies do this?
If you think about it, Term to Retire coverage is already available for older people. In the case of our earlier examples, a 35 year old buying a 30 year term policy gets level coverage to age 65. That's what level to 65 means. If a 45 year old wanted level to 65 term coverage they can get it buy purchasing a 20 year term policy. If the 45 year old buys a 30 year policy, it provides level coverage to 75.
What if your age 47 and want level term to 65? You would theoretically need an 18 year term product but in the absence of 18 year term, you could buy a 15 year term which takes you to 62 or a 20 year term that takes you to 67.
But what about a 25 year old who wants coverage to age 65? Currently there is no such thing as a 40 year term policy available for a 25 year old and so the coverage and premium comes up short. Life companies need to respond to the needs of younger insurance buyers.
There is a way for younger insurance buyers to deal with that now and Complife has indicated to life companies that we would be happy to quote and compare these products for consumers. The products that can be used for this are NO LAPSE U/L policies. While these products would not be as simple as offering a level to 65 term policy they can be made to work.
For example, when my son was getting ready to buy life insurance for his family I explained all this logic to him. He was 27 at the time which meant that the longest level term he could get was 30 year term. A 30 year policy only provided him with level premium coverage to age 57. My son and I agreed that that was not long enough. We really needed the coverage and premium to be level to age 65. I contacted the insurance agent that I buy insurance from and found guaranteed level to 65 coverage by buying a NO LAPSE U/L policy.
As background, U/L (Universal Life) is a policy which is - for lack of a better word - universal. But that's also the problem with it. It's so universal that you can end up with the wrong thing so you need to pay attention.
In my son's case we wanted to set up a level premium period and coverage period to age 65. In other words, the premiums needed to stay level to 65 and the coverage needed to stay level to 65. While most universal life policies can be manipulated to PROJECT that outcome, we wanted that outcome guaranteed. Many U/L policies DO NOT PROVIDE THAT GUARANTEE.
To get the guarantee you need to get a universal life policy with NO LAPSE protection. A NO LAPSE guarantee is a secondary or additional guarantee which life companies provide on SOME - NOT ALL - universal life policies. The company will specify a premium and coverage period, then FULLY GUARANTEE that premium and coverage. As long as you make each premium, you get the coverage and guarantee. This is no different than a comparable term policy, and in many cases equally competitive.
In my son's case he got that coverage and premium guarantee and it was not much more money than a 30 year level term product.
In discussing the COMPULIFE challenge with life companies, we have advised those life companies that COMPULIFE would be happy to include their NO LAPSE U/L policies in our comparison software if they would simply provide us with level to 65, 70 and 75 premium solutions that give consumers guaranteed coverage and guaranteed premiums for those level periods.
Companies are already indicating to COMPULIFE that those values will be forthcoming. As quickly as COMPULIFE obtains that information, it will be put into our comparison software. Once consumers and agents compare prices for this product option, and once life companies realize that consumers want and need these types of policies, and are buying those policies, we expect to see additional companies offer comparable products.
COMPULIFE has every confidence that this will happen even though the industry has not addressed this idea to date. At one time in past years no life insurance company offered 30 year term. Today most companies selling level term at competitive prices also offer 30 year term. Just because companies don't offer level term to 65, 70 or 75 doesn't mean they won't.
In the meantime, consumers that need term life insurance should go as long as they can in order to get coverage and premiums guaranteed to the point of retirement. A term policy that covers you to the point that you retire is the right term policy to have.