Term Life Insurance

term assurance colorful word on the wooden background
"PERMANENT" word on missing puzzle with a hand hold a piece of "TEMPORARY" word puzzle want to complete it - business and finance concept

LIFE INSURANCE FOR TEMPORARY INSURANCE NEEDS

features-term-life-insurance

Term Life Insurance is the least expensive life insurance solution providing financial protection with guaranteed level premiums for a period of time e.g., (5, 10, 15, 20, 25, 30, 35 or 40 years).

Term Life Insurance pays a death benefit only if you die while the term policy is in effect.

Term life insurance will pay a death benefit if you died a day after the policy is in-force, and the term premium will remain unchanged for as long as the premium rate is guaranteed.

Term Life Insurance has no moving parts other than paying your premium on time.

Term Life Insurance guarantees your insurability at the premium rate you qualified for when you were approved for your life insurance, and the “Escape Clause” allows you to exchange or convert your term life insurance to a permanent life insurance policy without any medical underwriting.

Term Life Insurance provides an “Accelerated Death Benefit” for a terminal illness.

Term Life Insurance benefits are received income tax-free.

ADVANTAGES

Term insurance simplifies your life insurance choices.  It’s easy to understand, very affordable and offers the greatest amount of life insurance financial protection for a specific period of time, which are its MAJOR ADVANTAGES.     

Term life insurance solves lots of temporary needs, provides PEACE-OF-MIND AND FINANCIAL SECURITY, and certainly has a place in many planning scenarios where financial protection needs are clearly defined and might terminate after a specific point in time.  It’s a good solution for a young couple or family beginning the journey of life together on a fixed budget with large debts, such as student loans or a mortgage.  It also works well in many business planning situations.

TERM LIFE INSURANCE PROVIDES THE ANSWER WHEN NEEDS ARE CLEARLY DEFINED FOR A PERIOD OF TIME!

Here are a few of the more common uses:

Income Replacement – – Most Important!

For more info, see “How Much Life Insurance Do You Need?”

Mortgage protection for a period of time.

Paying future college costs.

Ideal collateral for short-term debts, or personal loans.

Business situations e.g., (Buy-Sell, Key Person, Loans).

time in bottle

DISADVANTAGES

What do you do when time runs out on your term life insurance?

What happens when you’ve recognized a need for life insurance CA$H going forward in life?  But your current term insurance is about to end at a time when you’ve had a change in health over the years, and you didn’t exchange your term policy into something longer lasting when you had the chance (term conversion)?  IT CAN PROVE TO BE A COSTLY MISTAKE!  

Term by nature and actuarial design is intended for temporary needs and terminates before the average life expectancy of most insureds.  Term life insurance would cost much more money if this were not true.

Term life insurance undercharges you in the early years when mortality is not likely and the insurance company is less likely to pay a claim while substantially overcharging you in later years when mortality is more likely.  Consider the examples below of actual client policy premiums when the rate guarantee ends.

You trade your early years when premiums are low for later years when premiums will be much higher for another term or permanent life insurance policy.

come-to-terms

WITH TERM LIFE INSURANCE

(1) Real client examples of what term life insurance numbers look like at the end of the rate guarantee.  

Client A Male — $1,000,000 20-Year Level Term Taken Out May 5, 1997 (Age 39).  Annual Premium – $1,050.  Renewal Premium May 5, 2017 – $3,650 / May 5, 2018 – $6,260 / May 5, 2019 – $8,860 and the annual premium increases each year.  The client originally qualified at preferred best premium rates.  Client suffered a mini-stroke 2 years ago.  Insurability significantly changed.  The client didn’t want to pay the increased annual premium on May 5, 2017, and dropped life insurance policy with no life insurance going forward.   Who wins the life insurance company?

Client B Male — $300,000 20-Year Level Term Taken Out July 7, 1997 (Age 46).  Annual Premium – $778.  Renewal Premium July 7, 2017 – $2035 / July 7, 2018 – $3,415 / July 7, 2019 – $4798.  The client didn’t pay the increased annual premium on July 7, 2017, and dropped life insurance policy with no life insurance going forward.  Who wins the life insurance company?

Client C Male — $500,000 20-Year Level Term Taken Out December 5, 1997 (Age 47).  Annual Premium – $1,205.  December 5, 2017 $17,360 annual premium.  He can exchange (conversion) or drop the policy.  The client qualified at preferred non-smoker.  The client didn’t pay the increased premium and chose not to covert the policy.  Who wins the life insurance company?  

Client D Female — $200,000 20-Year Level Term Taken Out October 7, 1998 (Age 64).  Monthly Premium – $137.25.  She has exceeded the exchange (conversion) date.  She turned 84 when her monthly premium increased to $3,716.91 on October 7, 2018.   The client didn’t pay the increased monthly premium and dropped life insurance policy with no life insurance going forward.  Who wins the life insurance company?

(2) Term insurance is a hedge BET against the unexpected and tragic loss of life.  The great news!  It’s likely you will outlive the term rate guarantee, and the premium which throughout the rate guarantee was a bargain increases substantially by design and terminates when your premium is not paid.  You lose the BET – and you’ll probably agree with me that’s a good thing.  It’s a BET you don’t want to win.  Here’s the rub with term life insurance and the insurance company.  They WIN by keeping all of your premiums and give you nothing in return for what you paid them.  Yes, you did receive the peace-of-mind and financial security the term policy provided you.   Let’s assume the face amount was $1,000,000 and no longer in-force.  Was it a mistake for 20-years of premium at a $1,000 ($20,000) or a $1,000,000 mistake?  

But now you’re faced with a WHAT DO I DO situation, especially if you need or want life insurance going forward?  

(3) Expect the next term life insurance policy after age 50 to be much more expensive even if you’re in good health.   However, what happens if you’re not and there are underwriting issues?       

(4) What you never hear?  How few people actually die while insured with term life insurance?

LIMRA reports 2 to 3% of all term policies payoff in death claims.  YET 100% OF ALL TERM INSUREDS WILL DIE!

(5) Longer life expectancies with more and more people living into their 90’s and 100’s.  A second term life insurance cannot get past age 90 only a permanent life insurance policy can get you there.

Exit Strategy words written by man with a red pen or marker planning a way out of an agreement, contract, partnership, marriage or other arrangement

TERM CONVERSION CLAUSES CONFUSION

(NOT REALLY — I JUST LIKE THE WAY IT SOUNDS)

YOUR “ESCAPE CLAUSE” = YOUR “EXIT STRATEGY”

Why an exit strategy?

The need for life insurance cash is not only important in your early years for various reasons, but these same dollars can work for you in your later years by understanding the most important feature of term life insurance.  Your “Escape Clause” equals your “Exit Strategy”  A term life insurance policy with a good “Escape Clause” aka term conversion can be an invaluable benefit going forward in life when your life insurance cash needs will change and yes they will change!  

Your “Exit Strategy” enables you to keep life insurance that would otherwise lapse at the end of the term rate guarantee.      

I have seen where a term policy is purchased for one reason early in life and then used later in life for other life insurance cash needs, which is why term conversion is so important.  

These Double Duty Dollars allow you to use the same term life insurance dollars twice when you may need and appreciate life insurance, even more, going forward in life – and may have difficulty getting another policy if you had to medically qualify again for life insurance.

What is a term conversion?

This is the most important feature of any good term life insurance policy.  It’s a clause written into most term life insurance contracts allowing an insured / policyowner the valuable contractual provision to exchange some or all of your term life insurance to a permanent lifelong life insurance policy.  This is called a term conversion.    

When you purchase term life insurance, you are essentially renting insurance with an option to own it for life.  The conversion clause allows you to exchange some or all of your term life insurance without providing new evidence of insurability during the conversion period, which is usually the rate guarantee.    

The conversion clause allows you, for a higher price, to exchange your temporary insurance into a permanent life insurance policy without having to requalify or undergo and further medical testing or examinations.    

Otherwise, your term life insurance will lapse at the end of the rate guarantee.

How does it work?

Your insurability!  That’s the premium rate (preferred best, preferred non-smoker, standard plus or standard non-smoker ) you were initially approved for with the term life insurance.

Should you have a decline or significant change in your health and cannot go through underwriting for another life insurance policy, your term conversion option becomes more important to you because you can EXCHANGE SOME or ALL of your term insurance to permanent life insurance without any medical underwriting at the original premium rate you qualified for under the term policy.  THIS IS YOUR “ESCAPE CLAUSE” to continue a permanent life insurance policy for changing lifetime needs. Your insurability is guaranteed regardless of any change in health.

Here is an example.  I have a client who was approved with preferred best premium rates for a 20-year level term life insurance policy issued back in 1999 and after his policy had been in-force.  He was diagnosed with Multiple Sclerosis, which changed his insurability forever.  He has until December of 2019 on his term rate guarantee to exchange some or all of his term life insurance at preferred best premium rates for permanent life insurance with no medical underwriting.

Don’t get surprised!

Be careful, if you aren’t paying attention and forget to exchange your term within your the period of time as stated in the policy, you’re out of luck.

Make sure you understand the conversion period under your term life insurance contract.  

The development of a health problem is not the only reason to convert a policy.  Your premiums for conversion go up every year as you get older.  So, if you can begin exchanging your term toward permanent life insurance while in your 20s or 30s, the monthly premium will be much lower than someone in their 50s would pay.

The important points here are to exchange your term life insurance before it is too late and as young as possible.  Wait until you are 60 or 65 and you’re likely to pay very high premiums on conversion.

Term Conversion is easy.

Exchanging your term life insurance to permanent life insurance is simple.  The paperwork is easy and there are no hassles, no medical exams or underwriting requirements.   

Some term policies even give you an initial credit for some of the premiums you will pay on a permanent life insurance policy.  This is an incentive to help reduce the premiums usually in the first year.

Businessman looking through binoculars. Lead vision Navigator pop art retro style. Business concept vision of the future

LOOK FOR THESE TERM CONVERSION KEY POINTS       

They represent future planning opportunities, not always understood and easily forgotten.

1) The lowest priced term life insurance does not always offer the best TERM CONVERSION opportunity, and not all term conversion “Escape Clauses” are created equal.  I will always recommend a little higher priced term life insurance product with a better term conversion option.

2) Are you allowed to exchange your term to any permanent product (whole life, universal life, indexed universal life, etc.) in their life insurance portfolio?  This is a more favorable situation rather than to one specific product, which is likely to be an inferior permanent life insurance product, not competitively priced and less favorable to you.  Is the term conversion to any permanent product guaranteed in the term policy or a company product marketing statement?

Ideally, you want the same policy (at your attained age) as an individual who is going through medical underwriting applying with the same company, same age, rating category, and premium, etc.  This way it benefits you and you’re not being discriminated against with your term conversion.  

3) You have to understand if you like whole life insurance and want to convert to a whole life insurance product in the future, you will need to purchase term life insurance from a mutual company, not a stock company.  A stock insurance company normally does not offer whole life insurance.  However, they may own a separate company allowing you to purchase a whole life insurance policy or have an agreement with another company to write their whole life insurance policies and make these products available on conversion.  Most companies and better term life insurance policies offer the majority of life insurance products in their portfolio.  Make sure you understand the details before you purchase the term life insurance.

4) How long does the insurance company allow for term conversion?  It is usually the term rate guarantee or to the earlier of age 65, 70 or 75 depending on the company.

Here are some examples:

30 year old takes out a 30-year level term policy and can convert to the earlier of the rate guarantee or age 70.  You have until age 60 then the term rate changes.

40 year old takes out a 30-year level term policy and can convert to the earlier of the rate guarantee or age 65.  You can convert until age 65.  Not available after age 65 for the last 5 years of the policy.

55 year old takes out a 20-year level term policy and can convert to the earlier of the rate guarantee or to age 75.  You can convert until age 75.

However, I have seen some 20-year level term life insurance policies that only allow term conversion for the first 10 years.   Note 10-years to convert isn’t always such a bad option because it forces you to convert when premiums are much less than what you would pay later in life when premiums for permanent life insurance would cost much more even if you had the additional 10 years.   Alternatively, should you have a significant change in health in year 9, you will only have 1 year to convert your term.  After the 10th year, you’re out of luck     

Pay attention to the period of time the insurance company allows you to exchange your term life insurance policy.  You don’t want to miss important dates.

IT’S GREAT THAT YOUR INSURABILITY IS GUARANTEED TO AGE 65, 70 OR 75.  BE PREPARED THE LONGER YOU WAIT TO EXCHANGE YOUR TERM TO PERMANENT THE HIGHER YOUR PREMIUM.  YOU DON’T WANT TO BE PRICED OUT OF A LIFETIME OPPORTUNITY SIMPLY BECAUSE YOU’RE OLDER.

5) Does the term policy allow for a partial or a total conversion?  A partial conversion is a much better option than a total conversion.  Maybe you only want to convert $250,000 (partial conversion) of a $1,000,000 policy rather than having to convert the entire $1,000,000 (total conversion), which may not be affordable.   A partial conversion lets you convert a portion of the term life insurance to permanent life insurance and keep the remainder of the term for the duration of the rate guarantee.  This is a much better planning option.

6) Does the company allow for some type of term conversion credits or discounts in the first year as an incentive to exchange your term to permanent life insurance?

WHAT I HAVE SEEN AND CAN’T ANTICIPATE IN HELPING YOU PLAN FOR A FUTURE TERM CONVERSION?  This is not always the case but I’ve experienced this in my career.    

I have seen insurance companies make changes to products in their life insurance portfolio even with a good term life insurance “ESCAPE CLAUSE”.   They may withdraw a particular product or increase premiums on a once competitively priced product due to profitability issues or economic conditions.

The insurance company changed their corporate status from a mutual company to a stock company, which eliminated whole life insurance as a permanent life insurance choice.  This occurred during the demutualization phase in the late 1990s and early 2000s when many major mutual companies became stock companies.

Exit Strategy words stamped in red ink giving a way out or escape from a contract, agreement or partnership

Your “ESCAPE CLAUSE” is VERY IMPORTANT and EQUALS your “EXIT STRATEGY”

RETURN OF PREMIUM TERM LIFE INSURANCE:

The return of premium feature will generally provide for a refund of all premiums you paid at the end of a level term rate guarantee period unless benefits are received for an accelerated death benefit for a terminal illness or death occurs.  Should the policy be canceled prior to the end of the term rate guarantee a portion of your premiums will be refunded to you.  The return of premium feature is provided for at AN ADDITIONAL COST.  Term life insurance for 20 or 30-years with this benefit will be more expensive than a term life insurance policy without this feature.  You need to consider whether the return of premium benefit is worth the additional cost.

OTHER TYPES OF TERM LIFE INSURANCE INCLUDE:

Group term life insurance provided by an employer.  You need to know the details of how long are your premiums guaranteed for.  Are they guaranteed for a level period of time or do they increase every 5 years?  Is the group life insurance portable if you leave the employer?  Can you exchange or convert the term life insurance to a permanent life insurance product?

Decreasing term life insurance policies, also referred to as mortgage insurance has a fixed premium over the entire term, however, the death benefit decreases each year and follows your mortgage debt respectively.  There’s not much sense in having such a policy considering the low percentage of death benefit payouts, and you’re paying a level premium for a reducing life insurance face amount.

questions-answers
Click the “+” to reveal the answer!

No! I only recommend guaranteed level term life insurance premiums for the entire rate guarantee so they will not change until the end of the policy.

No! The policy cannot be canceled by the insurance company as long as you pay premiums when due and it can’t be canceled due to a change in your health. You normally have a 31-day grace period to pay a premium. Your policy remains in force during the grace period.

You normally have a 31-day grace period to pay your premium when due. If you do not pay the premium within the grace period your term policy will lapse. The company may provide an additional month as a free reinstatement period. They will accept your premium and pay the policy to the next premium due date. There is no coverage during the free reinstatement period until the company receives your premium. A formal reinstatement of your policy will require full underwriting.

Group term life insurance provided by an employer will cancel if you are no longer an eligible employee and member of the group e.g., your employment ends. Your life insurance is usually not portable. Be sure to read and understand the termination and portability provisions of your group term life insurance.

Marc Maretsky Personal Insurance Services based in Beverly Hills, serves all of California and the United States.  I help my clients acquire life, disability, long-term care, and critical illness insured solutions, as well as enroll them into Medicare when eligible.

“No matter how fast technology changes our world and everything around us.  I believe the personal touch and a human voice are more important than ever.”

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