It goes without saying that term life insurance is the most popular life insurance product sold in the U.S. today. Term insurance is especially attractive for consumers looking for an affordable solution to replace their income and help surviving loved ones continue without financial difficulty.
Term Life insurance is cheap and it should be. Since most policies rarely pay out a death claim (less than 2%) and the insured is only paying for the cost of insurance (no cash value), a large term policy can be had for less than the cost of a monthly pizza habit.
Why is Term so much cheaper than Whole Life or Universal Life?
Term insurance has always been cheaper than cash value life insurance because, with term, there is no cash value. There are other reasons that make it less expensive as well:
- A Temporary Solution – Term insurance policies are sold in blocks of time like 5, 10, 20, and 30-year periods (the term). Even though most insurers will offer a renewal or conversion, the policy expires at the end of the term. It’s a fairly simple concept; the insurance company is betting that you won’t die during the policy term and you are betting that you will. If you do, your beneficiary gets the death benefit, if you don’t the insurer gets to keep all the premiums you’ve paid in and the interest they earn investing those premiums.
- Extremely Low Mortality Rate – Term life insurance policies have a minuscule mortality rate (1%) compared to Whole Life or Universal life. The reason is that most policyholders outlive their policy, convert it to a permanent policy, or simply let it cancel for a variety of reasons.
- You Overpay during the Early Years – This is something most term insurance policyholders don’t understand or are aware of. When you purchase a term insurance policy, you are typically paying level premiums even though the cost of insurance goes up with each birthday. This means in the early years of the policy you overpay your premium and in the later years, you underpay. Since many policies rarely make the half-way point, the insurer is making a bundle on your premiums.
Because term insurance is cheap, doesn’t make it the best fit for everyone. For example, term is rarely a good choice for Final Expense insurance. Consumers should always keep in mind that term is typically a temporary solution for a temporary problem.
The Pros of Term Life Insurance
All life insurance products have their pros and cons. Not because the product is inferior, but because the product should line up with the risk. The purpose of the insurance is always the determining factor for which type of insurance policy to purchase. In other words, the need should dictate the product. Here’s a short list of the Pros of using Term Life insurance:
- High Death Benefit – When consumers are looking for very large face amounts because of the size of the risk they want to insure, term is usually the better solution. Remember, earlier we spoke of temporary problems? Why would you buy permanent insurance for a debt or debts that will be paid off in 20 years? When it comes to replacing income, term insurance is the better strategy.
- It’s the Most Affordable Option – When a young married couple who is starting a family and accumulating a lot of debt, term insurance is the most affordable option, especially for young and healthy adults.
- You do have Options – Although term insurance is temporary, most insurance companies offer a handful of riders that will allow the policyholder to customize their policy to meet their specific needs. These riders can broaden your coverage and provide living benefits for the policyholder.
- Conversion Privilege – Many insurance companies offer a conversion privilege with their term insurance policies. This allows the policyholder to convert a portion or all of their term insurance to permanent insurance like whole life or universal life before the policy expires. This makes great financial sense because it is in the later years of an adult’s life when they will likely need less insurance, but it should be permanent insurance. The cherry on top is that when you convert your term insurance to permanent insurance, you don’t have to prove insurability (prove you are healthy).
The Disadvantages of Term Life Insurance
We don’t like the word “Cons” so we’ll go with “disadvantages.” Depending on your circumstances, term life insurance may not be the best solution to eliminate or mitigate your risk. Here are some reasons why:
- It’s Temporary – If you are looking for lifetime coverage, term is not the best solution.
- No Living Benefits – With term insurance, you are purchasing a death benefit only. Unless you add riders that provide living benefits, like the Accelerated Death Benefit (some policies include it) you are getting a death benefit only.
- No Cash Value Account – Since 100% of the premiums you pay for term insurance go to the cost of insurance, there is no cash value component in your term insurance policy. When your insurance policy expires (you choose not to renew it), that it’s. There is no refund of anything.
- There is no Flexibility – Some people say that Universal Life insurance is like Term Insurance with a cash value account attached. No, it isn’t! Term insurance has no flexibility which is one of the major reasons to purchase Universal Life. Once the policy is issued, you cannot change the face amount (death benefit) and you cannot change the periodic premium. You cannot skip payments or do anything else like you can with Universal Life so if these are things that are important to you, Term Insurance is not the solution.
How to Get the Lowest Possible Rate on Term Insurance
With today’s technology and insurance companies willing to share their rates, it is easy to shop for term insurance online and then purchase a policy in a matter of minutes. Today’s independent insurance brokers typically represent many of the top-rated insurance carriers who are the most competitive in the marketplace.
Using an insurance broker like The ELM Group allows you to shop your insurance policy with all of the highly-rated insurance carriers in the marketplace. Once you have decided on the type of policy will provide the best solution, you can depend on your broker to walk you through the underwriting and purchasing process. The broker works for you and not the insurance company, but the broker is paid by the insurance company and not by you.