14 September 2012 0 Comments

Understanding Life Insurance Policies — “TERM”

You don’t need to be an actuary to buy a life insurance policy, but you should have a basic understanding of important features in order to make intelligent decisions and to know what questions to ask your agent.  So, that’s what I’ll cover in my next few entries.

I’ll start with Term Insurance.  This is the simplest of all policies, but if you’re only making your decision based on today’s premium, you could be making a mistake.  Here are some questions to ask your agent:

  • Is the death benefit level for the duration purchased, or does it decrease?

Decreasing term use to be much more popular than it is today, but if you do run into a decreasing term policy, price out the premium for level term instead.  If you truly want a decreasing benefit you will probably get a better deal by purchasing more than one policy of different term durations, laddering the decrease to fit your needs.  Level term tends to be more competitively priced.

  • Is the premium guaranteed for the term duration I select?

Be wary of policies whose premiums are “trust me”.

  • What is the cost if I buy a little more coverage today?

If you think you need a little more insurance, but can’t afford more premium, ask what the cost to increase would be.  It will almost never be a pro-rata increase.  This is because there might be a premium discount for amounts over a given level and there is usually a policy fee that remains constant regardless of the face amount.  For example, a male age 35 in the best underwriting class might pay a monthly premium of $10.94 for a $240,000 Ten year Term policy, but get a $250,000 policy for $9.93 per month.

  • For how long is my policy convertible?

Conversion gives you the right to exchange term for a permanent policy without having to provide any evidence of insurability.  This could be an important feature in the future.

  • Should I buy Return of Premium (ROP) Term?

ROP Term is much costlier than regular term and it takes many years before any cash value is generated.  If you don’t have adequate death benefit, ROP Term is not for you.  If you don’t pay the premium for the entire duration, it’s not for you.  Think it over again.

  • I thought I was buying term insurance, but my policy says “Universal Life.”  What goes?

Some insurance companies are using a UL chassis instead of term.  It has to do with reserving advantages.  Just make sure that the premiums are guaranteed for the duration selected and you understand the conversion options.

Next on “Understanding Life Insurance Policies”—Whole Life.

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