Term Life – Is Price the Only Thing that Matters?

Price matters, but is that all that matters?

Consumers of term life make their buying decision based mainly on price, but there are a few other things to consider. With so many products similarly priced maybe consumers should look at the other features that might be important to them.

Let’s look at a few features and riders that may be worth considering when buying term life insurance:

  1. Conversion to permanent insurance without evidence of insurability
  2. What happens after the level premium period
  3. Long Term Care / Chronic Illness Accelerated Death Benefit rider
  4. Waiver of Premium rider
  5. Accidental Death Benefit rider
  6. Children’s Term rider

Conversion feature

The conversion privilege is the ability to exchange the term plan for a permanent plan of insurance without evidence of insurability.

This feature really only matters if the insured wants a insurance past the level term period AND their health has changed to the extent that they cannot go to market for competitive pricing on a permanent plan. However, if an insured’s health has degraded to the point of not being insurable or being highly rated then conversion feature is critical. It might be the only means they have of continuing to have affordable life insurance.

Going back twenty plus years most companies offered similar conversion features: they would let you convert to any permanent plan that the company sold, and you could convert it anytime during the level premium period at to some stated age like 65 or 70.

Over time these benefits have been degraded in order to keep pricing low. Now you will find only a minority of companies that will allow for the most generous conversion: the right to convert to any permanent product during the level period. Alternative schemes include: ‘conversion only’ (read ‘more expensive’) plans, shorter conversion periods, or some combination of these. A typical conversion plan now might read like this for a thirty year level plan: during the first ten years the insured can covert to any permanent plan, after that they can convert to a designated conversion only plan.

Even for the most generous conversion features it is uncertain what the any individual company may have available in the future. Suppose you bought a term plan that allowed you to convert to any plan the company sold. That seems like the best deal, doesn’t it? Then further supposed that the company was taken over by another company or  that this block of business was sold to another insurer or re-insurer. If the new insurer only offers one permanent plan then you are right back with the plans with weak conversion features.

 

What happens to the premium after the level premium period?

After the level premium period most plans change to an ART (Annually Renewable Term). This means the policy will renew every year, but the premium will increase as you get older. In most cases it means the premium is not affordable and the insured will have to decide to get another policy or drop the coverage. If they do keep the plan the rates from different companies can vary wildly.

Example: Male 35 standard nonsmoker, 750,000 of ten year level term

Plan from level period premium year 11 premium year 15 premium year 20 premium
Company 1 441 1,128 3.895 7,120
Company 2 438 9,113 10,298 14,573

I did find one plan with a different twist. Instead of the death benefit remaining level and the premium increasing; this plan provides that the premium will remain level, and the death benefit will decrease.

Example: Male 35 standard nonsmoker, 750,000 of ten year level term

Year Death Benefit
1-10 750,000
11 455,409
15 286,107
20 184,192

Long Term Care / Chronic Illness Accelerated Death Benefit rider

These riders are designed to offer an acceleration of the death benefit if the insured needs assistance with ‘activities of daily living’ or have a ‘severe cognitive impairment’. I’m not going to get into the fine print here, but please be advised there is plenty of fine print about when, how and under what conditions these riders will pay out. Additionally, if the rider is ‘free’ as part of the plan, then any amount accelerated will reduce the death benefit by more than than the payout (example – a acceleration of death benefit of $25,000 might reduce the death benefit by $40,000).

These riders are almost always offered on permanent (cash value) plans only. And when they are offered on a select few term plans you better check what happens at conversion.

Here is what I consider the main problem with these riders: If you accelerate the death benefit then you won’t have the death benefit  for it’s intended purpose: to pay your beneficiary at certain amount at your death. If you don’t need the life insurance for the death benefit why would you purchase life insurance at all. And if you want money for long term care coverage maybe you should consider putting money away just for that purpose or buy a long term care policy.

Waiver of Premium rider

This rider is designed to pay the premium in the event you become totally disabled. If you become disabled and you need money to pay this premium then you will probably need money to pay for a lot other things as well. Why not put this rider’s premium money toward a regular disability policy. A regular policy will have better terms and will pay out significantly more money in the event of a disabling illness or injury.

 

Accidental Death Benefit rider

Ask yourself one question: will your beneficiaries need more money if you die accidentally than if you die from an illness? The answer is obviously ‘NO’, so why would you pay extra premium for something that is not needed? If you still feel the need to pay extra premium just buy more life insurance that pays out no matter how you die.

 

Children’s Term rider

Ask yourself one more question: are you financially dependent on your children?. Of course not, so why not save that premium or use that amount to buy more death benefit on the provider(s)?