I was sitting at the kitchen table of a couple who had called me for help. When he called, he introduced himself by telling me who referred him to me, and, then, just as quickly blurted out: “We need your help.” He said he didn’t understand why their life insurance premiums kept going up each year and then confessed, “My wife told me to call you. We’re on a fixed income, and she is worried that if our life insurance premiums keep going up, we won’t be able to afford life insurance.”
As he set their policies before me to review, she reminded me of her concern. She also informed me she was taught the value of life insurance by her father who instilled in her the values of planning, responsibility, and taking care of family. “I don’t want to leave funeral costs and debt to others to have to pay.” “And I know,” she continued, “that if I were to die first,” (her husband gave her a look that says, “Don’t even speak of that!”) “Dale [her husband] would need money to fill the void I would leave. I’m sure he doesn’t realize my worth . . . “ He interrupted, “Of course, I do. Honey, you’re worth more than I can say.” “That’s not what I mean; I’m talking about financial value. You would need to fill in the gap of my lost income; and, in addition, you are too busy to take care of the house and do domestic chores, so you would need to hire out those things.”
“I hadn’t thought of that,” he quietly replied. “Gosh, you’re move valuable than I thought,” he proclaimed with a sly grin on his face.
“Just as I thought,” I half-stated to myself while reviewing their policies, “you each have a term policy in which you’ve outlived the term.”
“What does that mean?” she asked. Then, as a growing fear come over her countenance, she raised her voice, “Does that mean we have no life insurance?!”
“No,” I quickly replied, seeking to calm her fear, “you are still covered by life insurance. However, because you have outlived the term of your policies, the premiums will continue to escalate each year.” Then I showed them the schedules of their future premiums, located near the back of the policies.
“Unbelievable!” he almost shouted. “If I stay with my policy, it will eventually cost me THOUSANDS of dollars per MONTH just to keep me covered!”
“True,” I said, “which is why we need to do something about this now—before you get any older and before either of you acquire any health issues. Let me, first, ask you a few questions; then, based on your answers to my questions, I will get some quotes—based on your needs; and, then, we’ll get back together to discuss a plan of action.” “That sounds good,” they replied in unison, with visible relief spreading over their faces.
The above scenario is a true scene, which I have seen played out—in one form or another—many times. Fortunately, we have been able to deliver a lot of people out of that experience of helplessness and hopelessness; but it is always better to be prepared from the beginning, rather than to frantically look for deliverance from a hole you have stumbled into.
Am I saying, by this dramatization, that term insurance is bad—that is the evil we need to avoid? Not at all. Term insurance definitely has its place in life planning—and what will eventually occur at the end of that life—but it is not for everyone.
The Value of Term Life Insurance
Term life insurance is the lowest cost life insurance available today, meaning term insurance is the least expensive way to purchase a substantial death benefit per premium dollar over a specific period of time. The reason term life insurance is the lowest cost life insurance is because far fewer term policies pay out (the death benefit) than any other type of life insurance. Here is the way it works.
An individual takes out a term life insurance policy. The term could be as little as 5 years, or it could be a 10-year term, a 15-year term, a 20-year term, or, depending on one’s age, a 25-year or 30-year term could be available. (Definitely, if you’re 65 or older, the 25 or 30-year term will not be available). The premium is locked in—does not increase—for the duration of the term. When the individual outlives the term (as most people do), the premium goes up; and it typically continues to increase each year after that—until, either the death benefit pays out or the individual drops the coverage due to high premiums.
Term Life Insurance Isn’t for Everyone
Years ago, a charismatic, high school coach began a multi-level company selling life insurance and writing mutual funds. He was passionately convinced that term life insurance was for everyone—that is the only life insurance product anyone should buy; and he drove home that philosophy by crafting this continuously-repeated theme: “Buy term and invest the difference.”
He was highly successful, selling a lot of term insurance and writing a lot of mutual funds on his own; but he also recruited hundreds, who then recruited thousands, etc. to sell under him. The philosophy made sense to everyone who bought into it, but the real tale would be told many years later—when those who bought into the philosophy outlived the term of their life insurance plans. When that occurred, most had intended to invest the difference but had not done so. They were then left with little or no money laid aside for retirement and life insurance they could no longer afford, though they had paid premiums on that insurance for 20 or 30 years. Thus, many years later, following the death of that well-known coach, the rest of the story was told, and it was not a happy ending for many.
Term life insurance isn’t for everyone; for, as (mentioned above) the coverage will not be available at the time of need for many, since it will be dropped when the premiums become unmanageable for the one paying the cost of insurance. So, who should look at purchasing term life insurance?
Where Term Life Insurance Makes Sense
The first group of people who are good possibilities to purchase term life insurance are those seeking to insure for the life of their mortgage. If, for example, the primary wage earner in the family has 15 years left on his or her mortgage, he / she could take out a 15-year term life insurance policy so that, if he / she dies during that period, the mortgage will be paid off. That ensures that the spouse and / or family will have a home to stay in—one where nothing (other than taxes and insurance, of course) is owed on it. That scenario makes sense for term life insurance.
Another situation where it makes sense to purchase term is where the primary wage earner in the family has young children but doesn’t have a large financial means. In that case, that individual may, for example, take out a 20-year (or so) term policy so that, if he or she were to pass away during that period, the death benefit would provide the means for the children to get through school and to get a good start in life on their own.
There could be a few other situations in which someone might be wise to purchase term life insurance. For example, if your children are in their 20s or 30s, and you would like to leave them extra money to help them and their families, term life insurance may be a good buy for you. Term might make sense in this case because you may be of the age where a large face amount (death benefit) with a permanent plan may not be affordable for you. Just keep in mind the risk of term life insurance—that you could outlive the term and face the possibility of dropping your life insurance. (However, in this scenario, a convertibility option on your policy could be a very good thing to possess. See information on this article below.)
However, before a determination should be done on that, the individual should meet with a reputable, licensed, independent agent who will do an involved needs assessment (take them through a series of questions, leading to a good understanding of their circumstances, needs, and goals).
Even then, expect your agent to shop several different insurance companies for the best options with the realization that term life companies are not all created equal. For you want to make sure you not only get the best rates on your premium, you also want to be with an insurance company that has a high rating (such as an A.M. Best rating of A- or better); and you want a plan that permits good convertibility.
Convertibility: A 50-Cent Word for Flexibility
Aside from relatively inexpensive rates, the best term life plans will allow convertibility. What is convertibility? I’m glad you asked.
Convertibility means that, up to a point, the insured has the option of converting the term policy to a permanent policy—without having to prove insurability. Thus, suppose a man takes out a term life insurance policy, but a few years later, develops a significant heart condition. At this point—outside of a guaranteed issue policy (which has a high cost for the amount of life insurance one can get and offers a relatively low death benefit)—the individual is uninsurable. So, it may make sense to convert his term life insurance to a permanent product, which will ensure the insurance will be there when it is needed. (Keep in mind that the premium will be higher when converting, as it will be based on the premium of the permanent plan you pick [adjusted based on the rating the insurance company gave you via underwriting the term life plan].)
But realize that some companies offer longer periods of convertibility than do others. The best convertibility options typically give you until age 75 to convert; others give you to age 69; some even lower. If the monthly premiums of two plans are only a few dollars different, you might consider the plan with the longer convertibility period; it will give you more flexibility in your coverage, and it may make the difference one day between being covered and not having anything to pass on to your family.
Accelerated Death Benefit: Getting the Money When It’s Needed
Some insurance companies allow an accelerated death benefit on their term life insurance plans. With this option, when a licensed, medical doctor determines one has a terminal illness (with 24 months, or less, to live), the insured can elect to take up to 75% (less for some companies that offer this benefit) of the death benefit in order to use as he chooses (e.g., to help with medical bills, travel, mortgage payments, bills, etc.). This option provides you with more flexibility; for, when facing a terminal illness, it may be more beneficial to access the money immediately than to wait another year or two for the death benefit to pay out. (However, while the death benefit paid in a lump sum is not taxable, in some cases, there may be a tax implication on policy money that is paid to the insured via the accelerated death benefit. See a tax professional about this.)
Is Term Life Insurance a Good Buy for You?
As mentioned above, term life insurance is not a good buy for everyone, but it could be for you. If you are still paying on a mortgage, you may want to look at term to cover the length of time left on your mortgage. Or if you have younger children and your death would leave them (and your spouse) struggling financially, term life insurance—with a term long enough to provide for your children to get out on their own and get a good start in life—would seem to be a good buy for you. Perhaps your children are in their 20s or 30s, and you would like to leave them extra money to help them and their families, term life insurance may be a good buy for you (as long as you keep in mind the risk of term). Term life insurance could be a good buy for you in another scenario, which could be determined by a reputable, licensed, independent agency after doing a needs assessment with you. It all depends on your situation (present and projected), needs, and goals. Your first step toward discovery is to get wise counsel. Find an agent you can trust, and begin the discovery process.