IQ expert Tony Steuer: Explaining the terms of term life insurance
Q: Is all term life insurance created equally? Does it matter which type of term policy that I end up with? Is the lowest cost always the best option?
A: All term life insurance is not created equally. There are minor to major differences in the types of term life insurance that’s available.
There are two types of term life:
|Tony Steuer: Life Matters|
|Tony Steuer is a licensed individual life and disability insurance analyst.|
1. Level premium term life insurance
This provides coverage with a level premium for a certain number of years — typically 10, 15 or 20 — although some companies will offer different periods.
A key thing to weigh is whether the premium is guaranteed. Most companies will guarantee the premium for the entire level premium period, while others will guarantee only the first five or 10 years.
After the level premium period is over, some policies will continue with a premium that increases every year; the amount usually is significantly higher than you’d want to pay. Other policies simply terminate after the initial level premium period.
2. Annual renewable term life insurance
This coverage is provided with a premium that rises every year, and it may not even be guaranteed for a certain period. This type of coverage is not as common as it used to be, and at some point this coverage will become prohibitively expensive.
Here are five important factors to consider about term life insurance:
• If you have a level premium policy, is the number of years remaining sufficient to meet your needs? If not, you should consider buying a new policy with a guaranteed level premium to meet your current needs.
• Does the policy have a conversion option? This option allows you to convert your term insurance coverage to a permanent life policy without having to come up with further evidence of insurability. This is useful if, for instance, you develop health problems. Ask whether you’re restricted regarding which policies you can convert to; some companies will limit you to a less-than-desirable policy.
• Just as you would re-examine your auto and home insurance situation every year or two, you should check whether you could qualify for a lower-priced term life insurance policy. Keep in mind that if you do replace coverage, your new policy would have a new incontestability provision and suicide provision for one or two years.
• Are there any riders (add-ons) you need or don’t need? For example, a waiver-of-premium rider can seem attractive, but it can be expensive. You might be better off buying disability income insurance.
• Is your group term life (employer-sponsored life insurance) really meeting your needs? Group term life insurance usually does not provide enough coverage to meet your needs, at least when it comes to the amount paid by your employer. Coverage usually is not portable, meaning that if you leave your employer, you can’t take the insurance with you.
Tony Steuer is a licensed individual life and disability insurance analyst; about 30 such analysts are licensed by the State of California. He has more than 20 years of experience in the life insurance industry. Steuer is a member of the Curriculum Board for the California Department of Insurance. He is the author of “Questions and Answers on Life Insurance,” a reference book covering an array of life insurance topics for consumers and advisers.
For more information, visit www.lifeinsurancetoolbook.com.
If you have a life insurance question for Tony Steuer, please send it to firstname.lastname@example.org.