Go Long on Term Life Insurance
Preserve and Guarantee Your Health Status

by Bob Barney, President of COMPULIFE® Software, Inc.

CAUTION: Do not select shorter level term periods planning to buy a new policy at a later time.

Most independent financial experts agree that buying term life insurance can save you money and I agree. But many make the mistake of buying a cheaper policy, like 10 year term, with the notion they will buy a new 10 year policy 10 years later. This may initially save money but that strategy could leave you with insurance premiums that you cannot afford.

WARNING: Factors used to determine if you qualify for lower "preferred health" rates tend to deteriorate as you age.

Consumer Insurance Services of Florida Many people take their good health for granted. Younger people often find it easy to qualify for preferred health discounts but as you grow older changes in your health can risk your preferred health status. Things that you may think are relatively minor can lead to higher premiums for new policies.

For example, have you noticed all the drug commercials for blood pressure and cholesterol on television? It is not uncommon for people, as they grow older, to develop these problems. Having the problem, or even taking medication to control the problem, can disqualify you from getting the lowest premiums that many companies offer.

If you develop a more serious medical problem it can lead to policy premiums that are increased with medical extra surcharges. Diabetes could easily double the premium a person pays for a new non-preferred policy. If a medical problem is bad enough, you could become what life insurance companies consider uninsurable and you may not be able to buy a new policy.

The point is this, as you grow older adverse changes in your insurability can negatively impact what you pay for a new life insurance policy or may leave you unable to buy life insurance.

A longer level premium period, which costs more,
protects your current health status and insurability.

Example: Another thing that life insurance companies look at, to see if you qualify for their lower preferred rates, is your height and weight. MOST companies use the same height/weight tables for a 25 year old as they use for a 60 year old. People naturally tend to put on more weight with age and so most will tend to fall from a preferred health status to a more expensive standard health status as they grow older.

IMPORTANT: When you purchase a longer level period policy with a preferred health discount, such as a 30 year term policy, your preferred status is guaranteed and does not change during the 30 years. If you put on weight during the 30 year level term period your premiums will remain unchanged. But if you purchase a cheaper 10 year policy, with the idea of buying another 10 year policy at the end of 10 years, all health factors including your weight will be re-examined. An adverse change could dramatically affect what you pay for a new policy.

Lock in your preferred status longer - buy a longer level period term.

This article will give you examples of the premiums you may encounter if you make the mistake of not buying longer level premium term life insurance. It will help you see the impact that a change in your health could have on future premium costs.

Why Buy Term Life Insurance?

Some explain that term insurance is for "short term" needs while whole life insurance is for "long term" life insurance needs. That distinction is confusing.

It is much clearer to say that whole life insurance is for problems that will exist for as long as you live. These are problems that occur "when" you die, not "if" you die. For life long problems whole life insurance can make sense because "whole life" is an insurance policy that covers you for the "whole" of your "life".

Term insurance should be used for life insurance needs that do not exist for the whole of your life.

For example, the most important reason anyone should buy life insurance is to take care of their dependent children if they die. This particular need for life insurance is not a lifetime insurance need. Eventually children grow up and become financially independent. No one needs whole life insurance to address this need.

The second most important reason to have life insurance is to provide for a financially dependent spouse. By contrast to the need represented by dependent children, this need can persist through middle age. The prospect of a reduced lifestyle with the loss of a spouse's income makes it desirable for most middle aged couples to continue carrying insurance. While providing protection for your spouse is a need that can continue beyond the point of raising children, even this is not a lifetime problem.

Retirement is the Turning Point

Consumer Insurance Services of Florida If you live to age 65 or older you likely plan to retire and stop working. In retirement you do not earn an income - you use your retirement savings to generate an income. If you die your spouse should inherit those retirement savings and the income that they generate. In a sense the surviving spouse is financially ahead because there is now only one person to feed instead of two.

NOTE: There are other factors that can alter a survivor's retirement income. Some pensions may not continue to a surviving spouse or the pension(s) may be dramatically reduced. While no one should voluntarily put their spouse in that position, when planning retirement income, some pension programs do not offer options that provide adequate income to a surviving spouse. If you are in that situation, whole life insurance may be a good way to address the problem. When you die, and your pension ends or is reduced, the whole life death benefit can give your spouse the cash to make up for the pension reduction.

IMPORTANT: Achieving financial independence through investments should be a significant priority for everyone. No one should plan to retire until that happens... because financial independence for you and your spouse is also financial independence for a surviving spouse. The need for life insurance, for the vast majority of people, ends once you achieve financial independence.

Are you currently planning for retirement? Would you like to calculate how much you need to save in order to retire? To see if you are on track to achieve your goals, click on our Retirement Calculator.

If you do not achieve financial independence before you retire, whole life insurance is not a solution - it is a problem. Apart from not being able to afford to pay the premiums in your retirement, you will need to quit the policy to get at the cash that's in it. A whole life policy that is terminated early (before death) is a policy that failed in its primary mission. The primary mission of whole life insurance is to provide insurance protection for the "whole" of your "life" so that when you die your beneficiary gets the death benefit. Aborting that mission, and cashing out a whole life policy, turns whole life into what was a very expensive form of term life insurance. That's why cash values are called cash surrender values. Surrender means to give up or quit.

To summarize, most life insurance needs drop to nothing by retirement. While some needs may continue, and while whole life may be an alternative for those lifetime needs, most consumers should purchase term life insurance.

Term to Retire

Level term to the point that you retire is a good strategy. If you buy a long, level premium policy when you are young and have children, then that same amount of insurance coverage is likely to be a good amount for your spouse as your children leave home.

But this begs the question, "If the need for insurance goes down as children leave home, isn't a level face amount going to be more than needed?"

THIS IS IMPORTANT: Inflation causes a level amount of insurance to be worth less over time. Because the need for insurance tends to go down, as your children grow older, and because the value of a level face amount goes down with inflation, keeping the same amount of level term through to retirement makes a lot of sense.

You also need to keep in mind that most people tend to earn more income as they get older. Some of the increase in income is due to inflation but some is due to job advancement. As your spouse and children become used to a higher standard of living, the need to increase your life insurance will occur. Therefore, it is highly unlikely that you will want to reduce your insurance coverage before retirement. It is more likely you will add additional coverage as you move forward.

What happen to a level term policy after the level premium period?

After the level premium period the majority of level term products become Yearly Renewable Term (YRT). For example, if you buy a 10 year level term, in the 11th year the premium will jump dramatically and that's just for the 11th year. In the 12th year the premium will jump again and continue to jump each year after.

The premium increases are enormous and will continue to go up each year.
Those premiums kick in right after the initial level premium period.

You can avoid that premium increase in the 11th year by going longer than 10 years when you start. In addition to 10 year level term, today's term market also offers competitive level premium products for 15, 20, 25 and 30 years. A 15 year term takes the big jump in cost in the 16th year. A 30 year policy puts off the big jump until the 31st year. By buying a longer level period you extend the time before you encounter those punishing annual renewal premiums.

You do not want to get stuck paying those annually increasing premiums.

The Buy and Buy Again Problem

Some insurance agents will tell you not to worry. Just buy the cheaper 10 year term product and buy another 10 year term product when the first one runs out. Some companies even offer this strategy as a policy option they call "re-entry". The problem with this re-entry logic is that you face all the medical and insurability issues over again. If your health changes you may not get a new 10 year policy for the price you think.

And how much would you save anyway? Is it really worth taking a chance? Using the same health status as we did for the 35 year old, a 45 year old can buy a 10 year policy for $400 and a 55 year old can buy a 10 year policy for $985. Let's compare that with the 20 and 30 year premiums:

Age 10 + 10 + 10 20 Year 30 Year
35 $165 $345 $529
45 $400 $345 $529
55 $985   $529

But let's take another look. Let's assume that during the first 10 years you gained some weight. We'll assume that you're still insurable but that companies are no longer willing to give you the cheaper preferred rates that were available to you when you were 35. What would a standard health 10 year policy cost at age 45? Instead of a premium of $400 the premium would be $630. And what would a 55 year old pay for a standard health policy? Instead of a premium of $985 the premium would be $1,450. Let's look at the same chart again:

Age 10 + 10 + 10 20 Year 30 Year
35 $165 $345 $529
45 $630 $345 $529
55 $1450   $529

What would happen if you developed a more serious problem than weight gain? What if you became diabetic? The standard premiums could be increased with medical extras. Suddenly you could be looking at premiums that are double standard health.

Is this really a risk worth taking? Remember, if our 35 year old buys the 30 year premium today, the preferred premium of $529 is locked in for a period of 30 years. It cannot be changed by the company. Is $45 per month too much to pay for $500,000 of life insurance?

I remember when grandpa used to say, "when I was your age...". While I hate sounding like grandpa I remember the first 10 year level term policy that I ever purchased. I was 25 years old and the policy was for $100,000. The non-smoking premium was $205 per year guaranteed for 10 years. Compared to the decreasing term that I had been buying before, $205 was a bargain.

Compare that to our 35 year old non-smoker. For $529 per year he can buy $500,000 of 30 year guaranteed coverage. I have to tell you, in the strongest language possible, that it makes absolutely no sense trying to save money buying a 10 year policy. The added risk just isn't worth it. And if our 35 year old buys that 30 year term policy, they can throw the policy in the top drawer and forget about it because the coverage and the premium are guaranteed for 30 years.

What About Conversion?

Despite the points I have made to this point, some agents will tell you to still buy the cheaper 10 year term policy. They will assure you that if anything happens to your health the company will let you convert the term policy to a whole life policy without medical questions.

If that sounds appealing to you, it shouldn't. Think about this: if whole life doesn't make sense for you now, why would it make sense 10 years from now?

Ask the agent to show you a whole life illustration for a person who is 10 years older than you are today. Ask the agent if that is the policy you can convert to if you use the conversion option. Unfortunately the agent can't give that assurance because the conversion option in a term policy makes no reference to any specific whole life policy or premium. The conversion option will say that the company will allow conversion to a whole life policy that they make available at the time of conversion (for conversion), for the premium that they are charging for the policy at that time. There is no guarantee what the policy will be or what the premium will be. Not much of a guarantee is it?

In the case of our 35 year old, you can rest assured that the cheapest possible whole life policy at age 45 would be $3,750 per year. To come up with that premium (which will be much lower than what a conversion policy would offer) I used the premium for the most attractively priced whole life available in the market today. It is quite safe to say the conversion premium would be a lot higher than $3,750 and $3,750 is a heck of a lot more than $529 per year.

To summarize, the ability to convert a policy is an option worth having versus not having it, but I would not rely on it to fix a mistake such as buying a 10 year term product expecting to buy another one in 10 years.

If you know you need term life insurance longer than 10 years, DO NOT BUY 10 YEAR LEVEL TERM. Get a longer level premium period.

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