What is term life insurance? I found a definition on Wikipedia to help define term life insurance.
Term life insurance or term assurance is life insurance which provides coverage for a limited period of time, the relevant term. After that period, the insured can either drop the policy or pay annually increasing premiums to continue the coverage. If the insured dies during the term, the death benefit will be paid to the beneficiary. Term insurance is often the most inexpensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis.
Let’s look deeper into some of these statements and see if we can gain a different perspective when we define term life insurance.
1. coverage for a limited period of time
Once you sign that paper, the clock starts ticking. It’s a race between death and the day the policy ends. If you live beyond the specified term, the policy expires without value. If the premium payments stop prematurely, the policy lapses and the insured is left with nothing.
But it’s a good thing if you don’t die early, right?
2. increasing premiums
The cost of premiums is based on your health. As you get older, the premiums can increase because your risk of death increases. As this happens, it gets riskier for the insurance company. Many policies require that you present evidence of insurability at renewal to qualify for lower rates. They can deem that you are uninsurable and deny you coverage.
What often happens is that these policies terminate during the years when people need it (when they’re older). Then they find that it’s harder and more expensive to get coverage. This can drive them to not get coverage at all.
3. paid to the beneficiary
Who’s the beneficiary on the policy? It’s not you. So, you can never take advantage of the death benefit (which is the only benefit). If you don’t die within the timeframe, no one gets anything. This is why our financial planner calls it death insurance.
Do you find it ironic that it’s called a benefit but someone else only benefits when you die?
4. often the most inexpensive
This is one of the biggest misconceptions out there. However, I can confidently say that this is the number one reason why people buy term insurance:
It’s cheap!
The Yugo, a car produced in Yugoslavia, was marketed in the US market in the late 1980s. It sold well because of its inexpensive price tag. But it came with costs: unreliability and inefficiency. But what could you expect with a car priced so low?
To help define term life insurance inexpensive premiums, let’s look at why they are priced so low.
About 1% of all term life policies pay a claim. Either the insured doesn’t die or the policy lapses due to unpaid premiums. Insurance companies know this from their actuarial calculations when pricing them.
There are no living benefits such as cash value or an investment component. Yet, people get enamored with this product because of its initial low price. It’s also the reason why people look down on whole life insurance policies.
So, is it really cheaper?
The premiums look cheap, especially in the beginning. But, the only time you get your greatest return on your money for this policy is if you die on your way home after purchasing the product. Each day you live longer, the policy gets more and more expensive each month. Because, again, the chances are slim that the policy will pay a claim.
The premiums are pure expenses that you can never recapture. Remember, not only are you losing the dollars going towards the premiums, but there are also the costs of lost opportunity. You are losing the opportunity to earn interest on those dollars that you have handed over to the insurance company.
There is a time and place for term insurance. Early on, my wife and I both had convertible term policies. Conversion rights usually guarantee that you will be accepted for the permanent life policy regardless of your health when you convert. The ultimate goal was to convert to all whole life insurance policies (which we did).
Now, how do you define term life insurance? Have you gained a new perspective?
Just like a Yugo, term life insurance can provide a solution to a short term goal. But although it’s cheap, in the beginning, it can cost you more as the years go by.
So ask yourself, do you want to depend on a Yugo-like product? Or, is there a better vehicle that can meet your needs and wants…while you are alive?
Key Points
1. Term insurance provides only one benefit: the death benefit. There are no living benefits.
2. About 1% of these policies pay a claim.
3. Convertible term policies can be purchased to later convert over into whole life insurance policies.
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