Since we are having these conversations on a regular basis, it seems like a good time to reiterate some of the basics of term life insurance.
How and Why
We often refer to term life insurance as “renting”. In the same way that you rent a cheap one-bedroom apartment to get you through college, there are good reasons to rent your life insurance coverage. The main benefit for renting your coverage is that, especially in the younger years, you are often able to rent a large death benefit amount for an inexpensive annual premium.
This lets you buy some time between when your heirs have no wealth to that point in the future when (theoretically) you have built up some wealth that is independent of your ability to show up for an income. When you walk out of life, dollars are supposed to walk in.
In most policies, and I would dare say every policy that we write, the premium for your term policy remains the same throughout the duration of the policy. If you got a 20-year term policy, whatever you are paying in year one, you are paying in year 19. At the end of year 20, you might get a notice that says you could get an annual renewal. The fine print of this is that such term coverage gets crazy expensive, and nearly only those who are imminently terminal resort to this.
Term policies exist for 10 years, 15 years, 20 years, and even 30 years. There are other durations out there, but these are the main ones. The most common duration we are seeing is the 20 year, probably because a lot of clients that rent term insurance are doing so to protect their livelihood until their kids get to or through college. We also see a few 10-year iterations used for business buy-sell purposes.
The reason we are not seeing a lot of 30-year terms written is because, in our experience as a financial advisory business, very few clients keep a term policy after year 20. In fact, they usually know well before year 20 whether they will be converting that policy, applying for a new one, or dropping it. This is not always the case, but since few policies would go to year 21 if they could, we do not see a lot of clients choosing to pay 30-year term rates in years one through 20.
While many clients stick with renting term for all their life insurance, we do see a fair number of situations that call for a permanent death benefit. This leads us to a little-known feature of some term insurance contracts, that we would like to make sure are available if you need them. Specifically…
Imagine you are renting a house, and the values in your neighborhood are going up and you have just received a great job offer from your current employer. You want to stay in town. Wouldn't it be nice if your landlord were required to sell the house to you at a predetermined price that you had agreed upon years ago, irrespective of the crazy housing market in your neighborhood?
Term life insurance contracts sometimes have this feature. It is called term conversion. It works like this: during what they call the conversion, which sometimes runs the duration of the term policy, other times runs for less, you can go from renting your term coverage to owning it, and it does not matter if you are as healthy today as you were when you applied, or if you have become a diabetic tobacco user.
Imagine I were to rent a term policy the same year I ran a marathon. Odds are good that I would be in the best health of my life. So let's assume that I get the term policy from Whale United (hypothetical company for illustration purposes only) at best possible health rating. Some companies call this “preferred best non-tobacco”. Then years later, let's imagine I develop a hypothetical heart condition, say pericarditis. If I were to go apply for life insurance after having been diagnosed with a heart condition like that, odds are good that life insurance carriers would not want to touch me with a 39 1/2 foot pole. In a situation like that, they might call me “uninsurable”. Here's where term conversion gets interesting. If the term policy I rented from Whale United has a conversion option, I would be able to convert from “renting” to “owning” at those original preferred best health ratings.
The example is hypothetical but the phenomenon of being able to go from renting to owning is real. And we call it a one-sided contract: The client isn’t stuck with the company or the life insurance if they don’t want to be, but the insurance company is stuck with the client.
How Do I Get It?
Getting term insurance is fairly easy, assuming you are insurable. Here is the process:
Needs Analysis: determine how much coverage is needed for how long.
Pre-screen for health rating: Figure out an educated guess on what health rating we could expect, without letting the life insurance company know it's you that is asking.
Select Company and Apply: Pick a competitive company with good conversion terms from a list of highly capitalized and stable life insurance companies. We really want them to be around and in business if they need to pay a claim.
Underwriting and Approval: Medical exam if needed, health records are obtained, insurance carrier gives you an offer, and you accept it or not.
You do not have to remember all this, and we walk you through every step of the way knowing what to expect. So if this is something that you need, give us a call. It is our pleasure to serve you.
These policies have exclusions and/or limitations. The cost and availability of life insurance depend on factors such as age, health and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Guarantees are based on the claims paying ability of the insurance company. Any opinions are those of the author and not necessarily those of Raymond James. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making a decision, and it does not constitute a recommendation. All opinions are as of this date and are subject to change without notice.