6 April 2012 0 Comments

More On Keeping Life Insurance In Force After The Duration Of A Term Policy Ends

Last time, I outlined your obligations (or lack thereof) when you buy Life Insurance and how to keep life coverage in force when a term policy reaches the ends of its duration by applying conversion rights in the policy. In this entry, I’ll address another option found in most term policies:  just keep paying an escalating term premium.

Term Life policies have a fixed level premium for a preselected period of time. At the end of the 10, 15, 20, or 30-year period you selected, the insurance company will continue to charge you a term premium that will keep the policy in force, usually until age 85-100.  Sounds good, right? It does until you see what that new premium will be.

As an example, let’s look at a 60 year-old female who has just purchased a 20-year Term Life policy. She is a Preferred Non-Tobacco User, so her annual premium for a $500,000 policy is $2,075. If she dies within the original term period of 20 years, she’s had a pretty good deal: The maximum cumulative premium she would have paid is just $41,500. As the table below shows, however, her annual term premium soars after she reaches the age of 80.

In just 5 years after attaining age 80 her cumulative premium will have exceeded the death benefit.  If she’s in poor health at age 80, this may be an option for a few years.  Even if the premium is not a hardship, it’s a terrible decision to make.   An actual case that was sold by one of my brokers many years ago on the life of a well known entertainer makes this point very clear.  When the insured reached age 81 the Chief Financial Officer of the insured’s corporation decided not to pay the next year’s term premium because by doing so, the cumulative premium from the date the policy was purchased would have exceeded the $1 Million death benefit.  They let the policy lapse and the insured, who was in good health for an 81 year old, died the next year.  In hind sight, that CFO made a lousy decision

Converting the term policy for our above age 80 example will not be an option because this policy’s conversion rights expire at age 70.  Instead of purchasing a 20-year Term Life policy for $2,075 a year when she was age 60, she could have purchased a Universal Life policy guaranteed to age 121 for an annual premium of $6,220.

If you’re buying a Life Insurance policy at age 55 or older, it’s very important to determine the duration for which the coverage will be needed so you purchase the correct type of Life Insurance policy. If you choose a Term policy, make sure you’re aware of the date on which your conversion rights expire. The 20-year Term Life Insurance policy in our example should be reviewed prior to its tenth anniversary, which is when the conversion right will be terminated. Converting the policy at age 70 in order to keep the policy in force beyond age 80 would certainly be a more viable option than facing those ugly escalating term costs.

Coming up Next: One More Option at the End of the Term Period

Leave a Reply