Term Life Insurance

Term life insurance is not a commodity.

It is important that the line above be the first thing you read. What it means to you is that term life insurance is not all created equal. There are differences in premiums, AND there are differences in policy benefits.

One of the axioms of life: TANSTAAFL, or There Ain’t No Such Thing As A Free Lunch

Or, to put it another way...You get what you pay for.

Term life insurance comes in several forms, for example:

• One Year Term, or OYT
• Annually Renewable Term, or ART
• Level Term
• 10 Year Level Term
• 15 Year Level Term
• 20 Year Level Term
• 25 Year Level Term
• 30 Year Level Term
• Lifetime Level Term

The longer the policy is guaranteed to stay inforce at a given premium, the higher the premium will be. At the most fundamental level, term insurance is priced two ways:

• Guaranteed Premiums for the Level Term, increasing every year after the initial guaranteed level term period.
• Guaranteed for a period of time SHORTER THAN the Level Term period, with possible premium increases in any year after that shorter initial guarantee period. This is known as “indeterminate premium” inside the life insurance business, and a consumer should be aware of the differences.

Term Conversion Options

Some policies are convertible to a permanent life insurance policy, like whole life insurance or universal life insurance, but some term polices are not convertible.

There is a cost for the conversion option, and this cost varies. Those policies that are convertible usually have a limited time period during which they can be converted. The longer the conversion period, the higher the premium.

Another difference is the portfolio of policies available for conversion. Some are limited to a higher premium, non-participating whole life that you might not want to purchase if you had a choice, while other term policies are convertible to several different kinds of very competitive higher quality permanent life insurance policies, including participating whole life insurance and interest sensitive universal life insurance. These superior conversion options have a cost, as well.

Riders (optional features)

Many term policies have optional riders, and while these riders may have similar names, the features, benefits, and costs of these riders can vary widely.

Waiver of Premium

Waiver of Premium for long-term disability. Generally, this rider will waive the premium when the insured is totally disabled. This rider varies widely:

• Some Waiver of Premium riders have a 6 month waiting period before benefits begin (this is like a deductible). Other Waiver of Premium riders have shorter waiting periods, such as 90 or 130 days.
• Many Waiver of Premium riders define disability as total, or the inability to perform any occupation. There are some Waiver of Premium riders that define disability more liberally, such as the inability to perform one’s regular occupation.
• Some Waiver of Premium riders waive premiums to age 60, others waive premium until age 65. What happens after that? Some policies will expire, others require premium payments, even though the insured is disabled. The more expensive Waiver of Premium riders automatically convert the term policy to a paid-up permanent policy at a specified age, such as age 65, if the insured is still totally disabled.

The better the benefits, the higher the premium, all other things being equal.

Child Term Rider

Another example of a common rider is Child Term Rider, which provides coverage for children of the insured. The cost of these riders varies, too. Some of these riders are convertible, some are not. Some are convertible for a multiple of the original face amount. For example, a $10,000 Child Term Rider might be convertible for up to $50,000 of permanent coverage on each covered child at age 25.

Some Child Term Riders become paid-up permanent insurance upon the death of the primary insured, while others only become paid-up term life until age 25, at which time they expire. Other Child Term Riders just expire upon the death of the primary insured.

Again, the better the benefits, the higher the premium, all other things being equal.

Return of Premium Rider

A very popular rider is the Return of Premium rider, sometimes called the Endowment Rider, that returns to the policy owner a percentage of premiums paid upon policy surrender, based upon a schedule in the policy, usually with 100% of premiums returned after 15, 20, or 30 years.

A Return of Premium rider can provide an Internal Rate of Return on the rider premium that may be competitive with other guaranteed investments, like CDs and government bonds.

Some policies have no-cost riders that are built into the policy, providing additional benefits that differentiate them from their competitors. For example:

• Common Carrier Death Benefit Rider - This rider may pay a death benefit that is double the policy face amount, up to a limit (i.e., $250,000) for death of the insured while a passenger on a common carrier (commercial airplane, train, bus).
• Accelerated Benefit Rider - This rider allows the policy owner to advance death benefits upon diagnosis of the insured with a terminal illness. Some advance 50%, while others advance 90% or more, up to a specified limit.
• Waiver of Premium for Unemployment Rider - For example, if the insured becomes unemployed and is eligible for unemployment benefits, the premiums for the policy may be waived for a period of time, such as six months.
• Residential Damage Rider - If the insured’s primary residence suffers a certain level of damage from a tornado, hurricane, flood, earth quake, or fire (i.e., $25,000), then the policy’s premiums may be waived for a period of time, such as six months.

Other Riders

There are other optional riders that one may add to a term life insurance policy. For example, a Disability Income Rider, that pays a monthly benefit during a period of total disability of the primary insured. Just like with the Waiver of Premium rider, the specifics of this rider vary, as does the cost.

Modal Premium Surcharges

One way that companies differentiate their premiums is how they charge for premium modes other than annual. For example, assume two seemingly identical term life insurance policies, each having an annual premium of $1,000.

The monthly premium for Policy A could be $90.00, while Policy B could be only $87.00, for a difference of $36 per year.

Does that mean Policy B is cheaper? Yes.

Does that mean Policy B is the better policy? Not exactly.

Perhaps Policy A is convertible through age 65, while Policy B is only convertible for the first five years. This may not mean much now, but if the insured is diagnosed with an illness that will prevent them from qualifying for new life insurance at standard rates, the conversion options become invaluable.

Why do we mention these term life policy differences? Because consumers need to know that the overwhelming majority of free online quoting sites that do not explain policy differences, other than monthly premiums, and this can lead to mistakes that can cost a policy owner many thousands of dollars over their lifetime.

The purchase of insurance is a serious decision, with significant financial implications for you, your family, your business, and your beneficiaries. That is why it is always a good idea to do business with a financial consultant and insurance agent that exhibits commitment to their profession. The best choice is an insurance agent that has earned the professional designations Chartered Financial Consultant & Chartered Life Underwriter.

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