Understanding Life Insurance Terms
Annual renewable term life insurance is automatically renewable each year up to a specific age limit (usually 65 but sometimes older). Since the chances of your dying increase statistically the older you get, your premiums go up each year as you renew. If you buy your policy when you are young and unlikely to die, you can obtain substantial coverage for an inexpensive premium.
Renewable term life insurance automatically allows you to renew your coverage after the term of the policy is over (generally 5 to 20 years), even if your health has deteriorated. This is similar to annual renewable term life insurance, but for a longer period of time. Since a lot can happen to your health in 5 or 20 years, renewability can be a valuable feature. But since it involves a greater financial risk for the carrier, renewable term coverage generally costs more than annual renewable policies. The conditions associated with renewable term may differ from company to company. For example, though you are guaranteed the right to renew at the end of your term, you may or may not be able to renew for the same amount of coverage or for the same term. Your premiums will almost definitely go up upon renewal.
Level term life insurance guarantees your premium will stay the same each year for the term of your policy, generally 5 to 20 years. Insurance companies keep your premiums the same by charging you an average of the premiums they would ordinarily charge you with an annual renewable policy. Therefore, you will probably pay more in the early years and less in the later years than you would if you had an annual renewable policy. You will probably also encounter a big increase in premiums at the end of your term when you apply for a new insurance policy. The big advantage of level term is that your premiums stay the same throughout your policy, even as you get older. However, if for some reason you change policies in the early years, when your level term policy is most expensive, you will end up paying more than you need to for coverage.
Decreasing term life insurance features a decrease in your cash benefits each year while your premiums remain level for the duration of the term. Decreasing term is typically used for mortgage payment protection insurance or to cover other items whose costs decrease over time. It isn’t a wise choice for your general life insurance needs, which due to the effects of inflation, tend to increase over time.
Convertible term life insurance enables you to convert your term insurance into any of the other types of insurance policies offered by the issuing insurance company. Convertibility can be an advantage if your insurance needs change over time, as they are likely to do. And, since it involves greater risk for the insurance company, it generally costs more than annual renewable.
Can I lower my insurance costs?
The price you pay for life insurance depends on your age, your health, and your lifestyle. If you are older, you have health problems, and are a smoker, you will always pay more for life insurance than someone who is younger, healthier, and a nonsmoker. Remember that there are ways to lower your life insurance premiums, even if you fall into a higher-risk category. Following are some simple suggestions for life insurance and term life insurance.
Often, you’ll actually pay less for a little more life insurance as you approach multiples of $250,000 in coverage. For example, $240,000 of life insurance coverage might cost $275 per year, while $250,000 in coverage might cost only $260 per year. Find out the rate per $1,000 of coverage, which often drops once you pass a certain level of coverage. This figure will help you determine how to get the most life insurance for the least money.
Everyone knows that you’ll save money on your insurance premiums if you quit smoking, start exercising, and lose weight. But you might be surprised to find out just how much you can save. Many insurance companies charge smokers double the nonsmoker rate for insurance (Don’t even think about lying. If you end up dying of a smoking-related illness, your insurance company can opt not to pay your death benefit.). Similar discounts can apply if you lose enough weight to fall into a preferred category.
Forget the riders.
While riders may add value to your life insurance policy in certain situations, many are simply an unnecessary expense. Paying extra money to cover an event that’s almost guaranteed not to happen just doesn’t make sense when you’re trying to cut costs. Additionally, many riders simply provide duplicate coverage once your overall insurance needs are met.
Find out about hidden fees.
You may not realize it, but your life insurance could end up costing you more if you choose to make “convenient monthly payments” rather than paying the entire premium up front. Before you choose a payment plan, compare the single payment price to the total cost of the monthly payments. Do the math, and decide whether the convenience is worthwhile.
What should I ask my agent?
Does this policy truly meet my needs?
If your agent recommends a term policy, consider the following:
How long can I keep this policy?
If you want the option to renew the policy for a specific number of years or until a certain age, ask your agent about the terms of renewal of the contract.
When will my premiums increase? Annually? Or after a longer period of time, such as five or 10 years?
Can I convert to a permanent policy?
Some policies allow you to convert the policy to permanent insurance without a medical exam, regardless of your physical condition at the time of the conversion. These policies are known as “convertible term.”
If your agent recommends a permanent policy, consider the following:
Are the premiums within my budget?
Be sure you want to spend the money for this type of long-term coverage.
Can I commit to these premiums over the long term?
Keep in mind that permanent insurance is designed to provide protection for your entire life. If you don’t plan to keep the product for many years, consider another type of policy. Cashing in a permanent policy after only a couple of years can be a costly way to get insurance protection for a short term.
Why do I need life insurance?
Life insurance provides you and your family peace of mind and underpins any effective financial strategy for dealing with loss. Simply put, having life insurance means that if you die, your family will have needed cash. When it comes to safeguarding your family, choose the right life insurance policy now. It’s one of the most important decisions you’ll ever make.
If you have a life insurance policy, you have a way to:
- Supplement your retirement income
- Continue taking care of your family after you die
- Help your family replace lost income
- Cover any expenses related to your death
- Bolster family finances to protect against unexpected future obligations
- Give your survivors flexibility for dealing with the future. Proper finances prevent them from having to alter their living or job situations immediately after your death
- Help maintain your family’s standard of living by paying for such everyday expenses as groceries, bills, rent or mortgage
- Contribute towards ongoing child-rearing expenses
- Pay for your children’s education
- Provide peace of mind for you and your family
Remember, you’re not only buying life insurance for peace of mind today, but to protect your loved ones tomorrow.