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Term Life Insurance

Term Life Insurance

Described as “Pure Protection”, Term Life Insurance provides a death benefit for a defined length of time (the “term”) such as 1, 5, 10, 15, 20, 30 years or longer the longer the term, the higher the cost will be.

If the insured dies within the term of the contract even on the very last day the insurance company pays a death benefit to the beneficiary.  In this type of life insurance, there is no cash value.  The low premiums pay for the death benefit and provide some profit to the insurance company over time.  Most larger insurance companies offer at least one type of term life insurance along with their cash value policies.

There is nothing inherently “bad” about Term Life Insurance, just as there is nothing inherently “bad” about any other type of life insurance.  It is sometime described as “temporary” as a way to make it seem inferior to a cash value policy, which will probably be described as “permanent”.

Get more protection for less money, or save money and have the same amount of protection as whole life insurance

Term life insurance offers policy-owners the ability to obtain a larger amount of death benefit for the same premium that a person might pay for a much smaller amount of cash value life insurance (whole life, universal life).  Or, conversely, a term policy will have a lower premium compared to a cash value policy of the same face amount.

Most term policies marketed today are called “Level Term”.  This means that the face amount of insurance remains the same every year.  Another form of term insurance is called “Decreasing Term” and the face amount of insurance goes down a bit every year.  Decreasing term is often used to provide the money needed to pay off a mortgage or other debt that also decreases as payments are made.

A “Level Premium” policy is one in which the monthly premium does not change during the term of the contract.  Most Level Term policies, and nearly all Decreasing Term policies, are based on a Level Premium.  But not all policies have a level premium in all years of the contract.  For example, a Level Term policy “renewable to age 95” may only have a level premium for the first 1, 2, 5, 10, 15, or 20 years (there are a few companies now offering 30 and 40 year term policies).  You have to read the contract to know what the “rules” are.

Term life insurance will become more expensive when you renew the policy — because you are older!

Nearly all term life policies are renewable at the end of the term.  Without having to prove insurability, the policy-owner may continue the policy into the future for a period of one or more years.  However, the cost to continue the policy will be higher often three or four times higher than the original cost.  And the cost of continuing the policy could increase every year.  A policy that renews for only one year at a time is known as Annually Renewable Term (“ART”).

Some 10- or 20-year level term life policies may be renewable for the same duration, but many transform into Annually Renewable Term at the end of the original term, or at the end of the Level Premium period, if that is shorter than the term of the policy (some “20-year” term policies only have level premiums for the first 5, 7, or 10 years, and are not renewable without proof of insurability at the end of 20 years).

Term life insurance is not always the right choice for every situation.  Everyone has unique needs.

Term Life Insurance is suitable for many, but not all, situations.  It is particularly valuable for younger, married couples, especially those with children, who need a large amount of income protection while they are busy raising their families, and it frees up money that would otherwise be spent on cash value insurance premiums for savings in retirement accounts and investing in stocks, bonds, and mutual funds or Exchange-Traded Funds (“ETF”).

The low cost of term life insurance makes larger amounts of insurance available.  After several years of paying premiums, many term policies permit the policy-owner to “exchange” or “convert” the policy into a cash value policy.  Again, without having to prove insurability, the same face amount of insurance will be available in a new Whole Life or Universal Life policy.  Because these policies have cash value, and because the insured is older, the cost of the new conversion policy will be significantly higher.  But this can be an advantage compared to renewing the term policy several years later.  You have to do the math!

Term life insurance, although less costly initially, is not the best solution for someone who knows they will have a continuing need for the protection of the death benefit.  And, on occasion, a proper life insurance “prescription” may include a combination of term and cash value life insurance.  This would be especially true of the estate planning need for life insurance, or to provide funding to business partners interested in purchasing the share of a deceased partner’s interest in the business.  Locking in a lifetime premium payment in a Whole Life Insurance policy or a Secondary Guarantee Universal Life policy will be less costly over a long period of time (more than 20 or 30 years).

An agent should discuss and understand your long-range needs before recommending any particular insurance product.  Early mistakes are very costly to correct in later years, and in some situations, corrections may not be possible at all.   Beware of agents who have only one product they are willing to discuss.  They most likely have good intentions, but they may not have the insurance product that’s right for your need.

Every situation is different.  No one policy or type of life insurance will fit all situations.  The “solution” proposed by an agent should be based on a thorough needs analysis looking closely at income, debt, expenses, savings, and future financial goals and objectives.  A proper analysis requires substantial data gathering and several hours of “number crunching”.  And it should result in a complete written report that explains what your present situation looks like, identifies areas of concern, and addresses unmet needs.

Term life insurance is sometimes referred to by agents as “temporary” insurance, as if that is a disadvantage.  These same agents will describe their cash value products as “permanent.”

The truth is cash value insurance is only as permanent as the cash value.  If you stop paying premiums, the insurance company will use your cash value to make the payments until all of it has been used up.  Then, without paying more premiums, your policy would lapse without value.

Borrowing money from the cash value accelerates the potential for a policy to lapse.  But term life has no cash value, so it will lapse almost as soon as you miss a single payment.  With either type of life insurance, before your policy lapses, you will have a 30-60 day “grace period” in which to pay the past due premium and keep your policy in force.

I don’t refer to life insurance as temporary or permanent, because neither term is truly accurate.  Not all people need life insurance for their “whole life.”  But if you do, then a term life policy will not be the best choice in the long run.  It can be the most appropriate starting point, but at some later date, you will need to replace it or convert it to a cash value form of insurance.  And at that point, you may not like the cost, and purchasing a form of cash value insurance could have saved you money.

Knowing what your long term financial needs and goals are is critical to making the right choice when it comes to your life insurance.  Only an in depth interview process will reveal that information.

Mario Pinzon

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