AxTenk Blog

How to invest on Term Life Insurance - Part2

HOW DO I SELECT THE BEST OF TERM INSURANCE?

In contrast with permanent cash value types of insurance, the term insurance policy, with the lowest premium among all identical term insurance policies, is generally the least expensive policy. This would seem to indicate that term insurance can be purchased as a commodity with the lowest price being the indicator of the “best” policy among insurers of acceptable quality and financial strength.

Factors to Consider When Comparing Term Policies

All of the policy provisions must be checked to see if the policies provide identical benefits. In most cases, the policies available from different companies will not be identical. Therefore, the slight differences in the policy provisions will need to be weighed against the differences in the premiums.

Here are some factors to consider:

1.     In the case of renewable term policies, check the schedule of future renewal premiums. A policy with the lowest initial premiums may have higher renewal premiums than other policies.

2.     Check the age to which coverage may be continued without evidence of insurability. A policy with a lower premium may discontinue the automatic renewal right before other higher premium policies.

3.     Check the grace period provision to see if the policy remains in effect for 31 days after the expiration of the term of the policy. A policy that does not provide the grace period may leave the client uninsured if he or she happens to be late with a renewal premium.

4.     Check the age to which a convertible policy may be converted to ordinary whole life at attained age without evidence of insurability. It may be worth some additional premium dollars to guarantee this conversion right for additional years.

5.     Check whether the incontestability and suicide clauses of the conversion policy will be modified to provide that the two-year qualifying periods will run from the issue date of the term policy if the term policy is converted to whole life.

6.     Check whether the conversion clause permits the client to convert the policy to an ordinary whole life policy with the waiver of premium rider without evidence of insurability. If it does, check whether there are any limitations due to preexisting conditions.

The right to include the waiver of premium rider in the converted policy can be an important feature, particularly if the conversion to a policy with a waiver of premium rider can be made even if the insured is already disabled. Also, in those policies that permit conversion to a policy with a waiver of premium rider, check to see if there is a minimum age to convert (such as age 55) if the insured individual is already disabled. In general, it is worth it to pay higher premiums to acquire a policy with more liberal rules regarding conversion to an ordinary whole life policy with the waiver of premium rider.

The First Part of my writing will cover basic questions that everyone have. What is it? What are their advantages and disadvantages?

WHAT IS IT?

The two principal characteristics of term insurance are: (1) the insured must die for any payments to be made; and (2) by definition, the contract expires at the end of the term. Stated more specifically, a term life insurance policy promises to pay a death benefit to a beneficiary only if the insured dies during a specified term.

The contract makes no promise to pay anything if the insured lives beyond the specified term. Generally, no cash values are payable under a term life insurance contract. If the insured survives the specified term, the contract expires and provides no payment of any kind to the policyowner.

ADVANTAGES

1.     Term insurance allows a person to acquire the greatest death benefit for the lowest premium outlay when the policy is first issued. However, this does not mean that term insurance is necessarily the least expensive form of insurance over the full duration of needed coverage. Since term premiums increase at each renewal, at the later ages the premium cost will far exceed the level premium that would have been charged for an ordinary whole life policy issued at the same age as the original term policy.

2.     Term insurance is the best alternative for temporary life insurance needs. Usually term insurance is the best alternative if protection is needed for less than 10 years. Conversely, some form of cash value life insurance will generally be the best alternative if protection must continue for 15 or more years. If the duration of the needed protection is between 10 and 15 years, the best alternative depends upon the facts and circumstances of the case. As a general rule of thumb, term insurance will tend to be better than cash value insurance at issue ages below age 45, and worse at older issue ages if the length of the need for protection is between 10 and 15 years.

3.     Younger persons may acquire substantial face amounts of coverage at relatively low immediate cost, perhaps more than their immediate needs, and thereby guarantee that they will have the necessary level of coverage when their needs and family obligations later increase, even if they are then uninsurable.

4.     The conversion feature of renewable and convertible term allows policyholders to enjoy higher death protection than they could otherwise afford and later allows them to “lock-in” their premiums and build cash values when their ability to pay premiums increases.

5.     Various types of term insurance—level, decreasing, and increasing—can be combined as riders with other types of permanent insurance to create a package that meets a person’s special death protection, savings, and affordability needs.

6.     Life insurance proceeds are not part of the probate estate, unless the estate is named as the beneficiary of the policy. Therefore, the proceeds can be paid to the beneficiary without any delay caused by administration of the estate.

7.     There is no public record of the death benefit amount or to whom the death benefit is payable (if paid to someone other than the deceased’s estate).

8.     The death benefit proceeds are generally not subject to federal income taxes.

9.     The death benefit proceeds are often exempt from state inheritance taxes.

10.  Life insurance policies can be used as collateral or security for personal loans. Although lenders generally prefer permanent types of policies because of the cash values, a term policy is often sufficient if the borrower is a good credit risk and the loan is very likely to be repaid unless he or she dies.

DISADVANTAGES

1.     Term insurance has no tax-free, automatic savings feature as permanent coverage does.

2.     The premiums increase until payment becomes prohibitive at later ages. This is one of the main reasons for the purchase of whole life insurance since coverage is useless if it cannot be held until the date it is needed most.

3.     Term insurance generally has no loan values and no living benefits.

4.     Term insurance only provides coverage for the term of the contract, not for the insured’s entire life. In other words the term coverage may expire before the need does. A person may become uninsurable at a later age when the need for insurance still exists.

5.     Life insurance of any kind is generally not available to persons in extremely poor health. However, persons in moderately poor health can often obtain insurance at “substandard” rates (a reference to the insured person’s health, not to the quality or strength of the insurance company), which means higher premiums. It is easier to find ordinary whole life policies than term policies for persons who fall into the substandard rating category.