Most people purchase term life insurance because they believe that they have a need to protect their family if they die. People usually choose term insurance if they have a limited budget or they feel the need to supply their loved ones with a large cash infusion upon their death to be a finite need.
When discussing life insurance, there is a debate in the world of personal finance experts and within the life insurance world in general regarding the pros and cons of term life insurance. Some suggest it is always the best type of life insurance policy because a person who purchases it should also be saving money in other places: bank accounts, brokerage accounts, retirement accounts while paying their term life premium.
The idea being that by the time your term insurance expires or reaches its affordable lifespan (more to come on that, keep reading) you will have enough money to “self insure”. It is an idea that works on paper and if you are the type of person that has an extremely stable, uneventful, and predictable life, it can definitely work for you.
But I will add a little commentary here from 20+ years of being in the life insurance business. I can count on one hand the number of people whom I have met that actually had this workout. And I have met thousands of people over my career. I will not go so far as to call it a fantasy but it usually doesn’t work out as neatly in reality as it does in theory.
What is the best term life insurance?
That is a really good question and I have a quippy answer that will probably not satisfy everyone but…
The best term life insurance policy is the one that you own and that is in force when you die. Meaning that when you pass away, you are still within the term period, your premium payments are current and the life insurance company pays your beneficiary(s) the death benefit that you paid for during the term period.
Now, not all term insurance products are the same but as the world exists today, in October 2020, your best all-around choices are level term insurance policies. The most common options here are 10-year level term, 20-year level term, and 30-year level term.
Which one you choose will largely depend on your age and your budget. Also, there are 15 and 25-year policies that are offered by some life insurance companies but 10,20, and 30 years are the most commonly offered and purchase in my experience.
The policy that works best for you will depend on a variety of factors including your age, health, and what additional features you might like to have as part of your policy. Some offer chronic illness benefits, critical illness benefits, accidental death benefit multipliers, and even return of premium.
What if you want to convert your term policy to whole life?
One major consideration that I always throw into the mix when discussing a term insurance purchase with my clients is to ask if they plan on ever wanting to convert the term insurance to whole life or some other form of permanent life insurance that has a cash value.
If that is part of their long term plan, I want to be sure that they purchase a term policy from a company that has a variety of options that are worth converting over to. Hope that makes sense to everyone reading this? If not, please reach out, we’d be more than happy to help you, just shoot us a message from our contact page.
What happens if I outlive my term life insurance?
That’s a really good question and one that everyone should definitely consider as a real possibility. The statistics suggest that something less than 2% of term insurance policies ever pay a death claim.
Now that is not because all of the claims are denied. I know that some people probably thought that. No, the reality is that most people stop paying their premiums or they outlive the term insurance coverage. It should really be no surprise that this is the case. If you look at the premiums you pay for a term insurance policy and think about it logically, you will figure out that the probability of the life insurance company actually having to pay a claim is pretty low.
In most cases, if you are still alive at the end of 20-year term insurance policy (for example), you have three options:
1. Allow the policy to expire. The insurance company is happy to let you go. Remember, they have collected 20 years worth of premium and now the company is off the hook for the death benefit.
2. If the company allows for conversion (to whole life or universal life) you can pursue that. And remember, in most cases, you can convert a portion of the death benefit to one of their permanent policies. Example: you have a term policy with a $500,000 death benefit, you’re approaching the end of the term and you’d like to have a whole life policy but you have a very limited budget. You could convert say $100,000 of it to a whole life policy and allow the other $400,000 to expire.
3. You can continue the coverage. Yes, even though the term expires you can keep the coverage but it will cost you. A lot in most cases. To get a better idea of that, take a look over here where you can see a policy illustration that clearly shows the dramatic increase in cost to keep the policy if you wish.
Do you get your money back at the end of term life insurance?
For most term insurance policies, the answer is ‘no’, you do not get your money back at the end of the term (10,20,30 years). However, there is an exception to this rule.
If you purchase a term life insurance policy that has the return-of-premium feature, you will, in fact, get all of your premiums that you maid over the term refunded to you. Generally, the return of premium term insurance is a bit more expensive than traditional level term policies but they do exist and are very popular for certain markets.
Here’s how those policies work. Imagine your name is Bob and your 44 years old, in decent health, and you don’t smoke or use tobacco. For a 30-year level term with return of premium with a $200,000 death benefit, you pay $66/month. At the end of 30 years, you’re still alive, that’s a good thing. The policy will return to you $23,760 which equals all of the premiums you paid into the policy over the 30-year term. Not a bad deal if you have no intention of ever converting your policy and you could always use that cash to pay off the mortgage on your house at the end of the term.
Should I convert my term life insurance to permanent?
This is a question that has no really simple answer. If you have a permanent need that you would like to cover, yes, you should convert your term life policy to something permanent (whole life or universal life).
Many times people purchase a 20-year or 30-year term policy with no intention of converting it. They are convinced that the need for life insurance in their lives has an end date. But life has a way of taking twists and turns that we don’t always expect.
In those cases, it could be changing family dynamics—someone getting remarried at a later age and having a second set of younger children—this one is fairly common. Or even more common is that you develop some sort of medical condition that would prevent you from being able to buy another policy. In that case, converting a portion or all of your term insurance policy maybe your best option.
There are also people who purchase a level term insurance policy with the intention of converting it later when their budget allows.
Not dying is a good thing
Hopefully, we can all agree that not dying is definitely a good thing. Remember, if you have a term life insurance policy and you don’t die, the insurance ends at the end of the term. The notable exceptions are that you specifically purchased a return of premium type policy or you are willing to pay the greatly increased premiums at the end of the level period to keep the policy in place. Ultimately, you should keep your term life insurance for as long as you have a need for the insurance–children at home, a non-working spouse to provide for if you die, or to pay off a mortgage. You have options to keep it as long as want and when you do not need it anymore, just cancel the policy or you can stop paying for the policy and the insurance company will cancel it for you.