Buying Term Life Insurance? Here’s 5 Things to Consider Other Than Price
We’ve all seen the television advertisements for cheap term insurance. “I protected my family with $500,000 of life insurance for only $18 per month,” proclaims a young, suburb-dwelling professional. Sounds like a good deal, right?
Everyone hates fine print (myself included). Unfortunately, it’s the details buried in the fine print that need to be understood before purchasing that cheap term insurance policy. For one, how long is the coverage for? 10 years or 40 years? How about the premium – will it be $18 per month for that entire time?
Perhaps most importantly: what if you actually die? Is the insurance company financially strong enough to make good on their promise to pay your family? Does their service model have a record of providing solid guidance to beneficiaries collecting death benefits? And what kind of settlement options are available – i.e., will your beneficiaries get a lump sum check or a stream of payments?
Everyone wants a good deal, especially when it comes to insurance. As you can see, there are many factors that go into getting a good deal, and a fair price is only one of them.
Financial Strength Ratings of Carrier
In the insurance universe, ratings agencies serve as watchdogs to keep the public informed on how financially stable a particular company is. Rankings are usually letter graded – however, what is the strongest ranking possible at one company may not be the strongest at the next, even though they use the same letter.
Life Insurance Carrier Rating Agency Names & Ranking
Name of Agency
Financial Strength Ranking Examples
|A.M. Best Company, Inc||www.ambest.com||Considered “Secure”|
A++, A+ (Superior)
A, A− (Excellent)
B++, B+ (Good)
|Fitch Ratings||www.fitchibca.com||Considered “Investment Grade”|
|Moody’s Investor Services*||www.moodys.com||Considered “Fair” or Better:|
|Standard & Poor’s|
|www2.standardandpoors.com||Considered “Adequate” or Better:|
AAA (Extremely Strong)
AA (Very Strong)
Duration of the Coverage Offered
If you own a term policy, flip it open. You may see that you are guaranteed coverage through age 95. Of course, your end of the bargain is this: you have to pay for it the the entire time.
What’s the big deal? Term insurance is cheap right?
Term insurance policy premiums are typically banded for simplicity’s sake. This means that the premium you pay stays the same for 10, 15, 20 or 30 years, depending on what the insurance company offers. This type of policy is known as “guaranteed level term insurance.” Does the coverage go away after that time? Usually, no – but what does go away is the affordable premium. It’s not uncommon for policies to increase tenfold on the 21st year of a 20 year term policy.
If you’re thinking, “Hey, I have a term insurance policy, but I already pay more every year!” then you may have what’s called “annual renewable term insurance.” The premium is substantially lower in the early years of the policy – even lower than a 10 year term policy in many cases. The trade-off: every year the premium goes up – and exponentially so the older you get.
Additional Policy Benefits
If you become disabled and can’t earn a paycheck, let’s face it: life insurance premiums will likely be on the chopping block. But what if your insurance company promised to pay the premiums for you?
This is just one of multiple available benefits, known formally as “riders,” to tack on to term life insurance policies. The cost is often less than a dollar per month. Other common term insurance riders include:
- Accidental Death Benefit: In the event that the cause of your death is ruled accidental, the death benefit often doubles, and sometimes even triples or quadruples. (I personally am not a fan of this rider – if you’re protecting your family, the amount of money they need isn’t going to double based on how you die.)
- Child Term Insurance Rider: Again, for what is tantamount of pocket change each month, you can insure your living and future children for $5000 or more. Typically, the death benefit expires on the policy anniversary following the child’s 25th birthday. Note that all children have to be insured equally.
- Spouse Term Insurance Rider: Just like the child term rider, you can protect your spouse with the a spouse term insurance rider for just a little bit extra each month. The benefit usually expires at a stated age – for example, age 60 – and can’t be more than the primary insured’s death benefit.
At the end of the level premium period (or at the time you’re just sick of paying a higher premium every year), you may wish to convert your term insurance policy into a permanent insurance policy. Examples of permanent policies included Guaranteed Universal Life, Index Universal Life, and Whole Life. The mechanics of these policies is beyond the scope of this post, but suffice it to say that not every company that offers term insurance offers permanent insurance; and not every term policy comes with the privilege to convert to a permanent policy, even if it’s offered.
Will your term life insurance policy always be yours?
If your employer provides you with a company car, you won’t get to keep it if you leave. Company provided term insurance – whether paid for by your company, or you – might not come with you if you switch companies or careers. (It certainly won’t come with you by default.)
Don’t get me wrong: if you’re offered term insurance through work, take advantage of it. The dangerous thing to do is to completely rely on it. Ask yourself: can you be sure the next place you go will offer you term insurance coverage? If they don’t, what changes in your health could occur that might prevent you from qualifying for an individual term insurance policy?
Not all term life insurance policies are created equal. When considering insurance, be sure that it fits your needs as well as your budget.
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