Term Insurance Explained
Life insurance comes in two types – temporary and permanent. Most people have some type of temporary insurance either as a term insurance policy, mortgage insurance, or group insurance policy (likely through work or an association plan like an automobile club). Some also have permanent insurance either in the form of whole life, insurance, universal life insurance, or Term to 100 Insurance. ce.
The purpose of this insurance is usually for a short term or temporary need (to age 55 or 65 while the family is growing up and you are saving for retirement. It is to provide cash in the event of your death so those who depend on you will have the money to:
Settle your debts – mortgages, loans (business & personal), remove guarantees, make up for the income you provided to the family – Remember the impact of inflation when doing this calculation. At 3% inflation, a need to supplement income by $25,000 will grow to $50,000 in 24 years.
Provide for children’s education, marriage etc.
Complete the funding for your spouses retirement plan – very important and why many need some term insurance to age 65 – this can also be a consideration for those looking for permanent insurance as well.
For businesses, it can be to fund a buy/sell agreement or to provide insurance on a key employee to provide cash to find a new person, absorb the financial shock of the loss and have additional funds to pass on to the family.
You can see the temporary nature of this insurance. It has a specific relatively short term purpose which will no longer apply by at least age 65. This insurance can be very inexpensive for the amount you are purchasing ($1 million can cost between $60 and $100 per month depending on age, sex and smoking habits) because most people will never collect it. It is purchased to cover you life when you are relatively young and the need is frequently gone by age 55 or age 65 for some of those concerned about saving for retirement.
It generally comes in 5, 10, 15, and 20 year terms. This means that the premiums are guaranteed for that period of time and they will automatically renew at a higher rate for the next term period. For example, a 10 year term policy has guaranteed rates for the first ten years and then you can renew it for another ten years without a medical at a set rate contained in the policy. Do not renew it if your health is good as the renewal rates can be 25% to 100% more than the premiums if you shop around for a new policy. The assumption is that you only renew if you are too sick to get a new policy.
Money Saving Tip 1: Over half the people renew term insurance and pay these high premiums – get a new policy – with preferred term rates it might be less than you were paying.
At one time, insurance premiums were divided into smokers and non smokers. However, the companies now have statistics that enable them to determine those who are least likely to die based on lifestyle, family history and blood pressure and some measurements they get from blood samples, such as cholersterol levels. About half the people will qualify for a preferred rate. At the time of this writing, a 35 year old should be able to purchase $500,000 for about $35 per month at regular rates but preferred rates would be in the $25 per month range. Some companies also offer a preferred smoker rate for those who would qualify for a preferred rate but they smoke.
Finally, there is the issue of convertible. You will see most policies are renewable which means you can renew them for another term of say 10 years and convertible. Convertible means you have the right to convert all or part of the policy to a Permanent Policy at any time during the term without a medical. You just pay whatever the rates are at the time of conversion. If you policy was issued on a preferred basis some allow you to convert on a preferred basis if they have preferred universal life insurance rates. This is an inexpensive option that is usually built into the policy cost and worth the extra price. A few companies will offer policies without this conversion option for a small savings.
Money Saving Tip 2: Ask for preferred rates. Refer to the sample questionnaire to see if you would qualify at Preferred Insurance Levels.
Money Saving Tip 3: There are significant differences between some companies in the percentage of people who will qualify for preferred rates ranging from under 50% to over 75%. Ask me about this.
Money Saving Tip 4: If you are a smoker of cigars or enjoy a pipe, some companies will consider you to be a non smoker. Make sure you get this rate.
It is not expensive to move the financial risks to your family of your death to an insurance company and it is the responsible thing to do.
Remember, the impact of inflation when doing this calculation. At 3% inflation, a need to supplement income by $25,000 will grow to $50,000 in 24 years.