If you are in the market to buy life insurance, you need to remember that not all term insurance is created alike. Here are some key items to remember so you can make a smart money move.
1) Renewable Term – Most often this comes in the form of yearly renewable term which your premium starts out incredibly low and increases every year you get older. Sometimes you can get this renewable term in a 5 year increment, but most often it is sold one year at a time. Depending on the company, you may not have prove your medical status yearly as long as you pay the premium.
2) Level Term – This is the most popular option today. You can essentially get a fixed premium with a fixed death benefit for a fixed period of time. The premiums on these policies are level for the length of time you have the insurance policy, and generally cannot be cancelled as long as you pay the premium. These usually come in 10 year, 15 year, 20 year, 25 year, and 30 year durations. Each company out there has chosen a given age and health condition as a sweet spot to sell their term insurance product, and no company has the best price for every age/health range. You want to shop 10 to 20 companies in order to get a top rated company that can offer you the best price based upon your age, health, and amount that you are applying for at that time. Many of these policies can be renewed, but at a substantially higher price. They may also require you prove evidence of insurability as well.
3) Decreasing Term – You don’t see this as often anymore, but they used to be sold as term insurance tied against your mortgage. The idea is that you pay a fixed cost for the term insurance, but the death benefit decreases each and every year. Decreasing term was designed with the notion of reducing your insurance as your liabilities or risks go down over time.
4) Convertible Term – This is an important question to ask about any term insurance you buy. With a convertible term policy, you can have the right to change your term policy to a permanent policy (whole life, universal life) without having to go through the medical underwriting process. It is often hard to predict whether some of the risks you are insuring for will actually go away over time. You may need the insurance in the future for estate planning, survivor income, or for liabilities that have become more permanent than temporary. Although convertible term may actually increase your rate, it does give you the flexibility to make your insurance permanent instead of temporary.
5) Return Of Premium – Sometimes, people feel cheated with term insurance because if you don’t die it is essentially money out the window. Some insurers now have created a return of premium policy which will cost substantially more than a regular term policy. However, if you do not die, the insurance company will refund you a certain amount at the end of the term contract.
There are other items to discuss such as ownership, beneficiary designations, and what your mix of work and individual insurance should be based upon your situation. People make the mistake of buying insurance on the internet without fully analyzing how it may impact their overall financial plan. With the right advice, you can figure out what type of term insurance is right for you.
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder oXYGen Financial, Inc.
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oXYGen Financial, Inc. co-CEO Ted Jenkin is one of the foremost knowledgeable professionals in giving financial advice to the X and Y Generation.
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