Occasionally, I hear a client or prospect share that they have heard financial “experts” say that permanent life insurance coverage is a waste of money and they just need to buy term insurance. We know that for many clients, permanent life insurance provides flexible, lifetime coverage and is often a good option to help protect a family or business. However, in a situation where the client’s needs are short-term or resources are truly limited, a level term product can provide an affordable solution that is a good first step towards helping address a client’s problems
Term Products Overview
Term life insurance provides protection for a limited period, or the term of the policy. The death benefit is paid if the insured dies within that specific term period. If the insured survives the term, the policy ends and no benefits are paid. Many term policies have a conversion privilege, which allows an exchange to a permanent policy without underwriting.
Three Primary Types of Term Insurance
Yearly Renewable Term (YRT) has premiums that begin low and increase each year. The policy renews each time a premium is received until the policy ends.
Level Term has a premium guaranteed to remain level for a stated number of years. At the end of the level term period, many plans can continue as a yearly renewable term at a substantially higher, increasing premium.
Return of Premium (ROP) has a level premium with an option to have some (or possibly all) of the premium returned. When the term period ends, 100% of the premium is returned and the policy expires. If the policy is surrendered before the term ends, only a portion of the premiums paid, if any, will be returned. These plans are more expense than other types of term life insurance.
Things to Consider
- Net Cost – the net cost of term insurance is equal to the total premiums paid for coverage. Since premiums increase with the age of the insured, a term product may be the most expense form of insurance in the end. It is a very real possibility that the insured could end up with a continuing need for life insurance, but be unable to afford the higher cost.
- No Flexibility – There is no flexibility in death benefit or premium. If the premium is not paid, the policy will lapse. Coverage cannot be increased or decreased.
- Conversion Privilege – A product that offers a conversion privilege provides the policy owner with an option to keep coverage beyond the normal term period by exchanging the policy to permanent insurance. There is usually a limited timeframe to convert the policy.
Remember, all products are unique and will vary depending on the issuing company. The key is to understand your needs and the products tradeoffs, so you can have a better understanding. If you are the Southeast I am here in and can help you understand each product type through a policy audit.