There is a rule in insurance policy creation that bears noticing. “Term insurance is actuarially designed to expire before you do.” As a policy owner you must be near certain that your need for insurance will expire coincidentally. If you cannot be sure, then at some point you will be forced to change to some other format. Build that into your plans.
You need to know at least this much about term insurance.
The premium to begin is the amount the company will need to hold enough money to pay expenses, earn some interest and pay out the very few claims that will appear in the term period. A way think about that is if you are a 30 year old male non-smoker, $2,000,000 of 10-year renewable term will cost you about $1,000 per year. Obviously the bet for year one through ten is your $10,000 against the insurer’s $2,000,000. If the insurer has 100,000 policies like this, they cannot lose. They know the odds, and the likelihood of our 30 year-old living 10 years is much better than one chance in 200 of death. The premium is based on a person who can pass a medical. Even a 60 year-old who can pass a medical are not very likely to die in the next 10 years.
Term insurance is entry level product. It is like the old progression that GM uses. Chevy when you are young, Buick next and Cadillac when you are established. Term becomes universal life or some other form of whole life coverage.
Policies covering a longer term period, like term 20 cost more because the likelihood of dying 18 years from now is higher than 8 years from now and premiums must accumulate to the right number.
Even if you took the entire population and understood the odds of a person who can pass a medical living 10 years, you would still find the premium offered was too low. Insurance companies are a form of charity I suppose. Maybe not.
Not every term policy is paid out. Even ones that are renewed each 10 years seldom pay out. Some people stop when the need disappears and others just stop. In any case, the insurer keeps the premiums paid. They know what the lapse factor has been historically. That found money can subsidize the prices.
Policies that have a longer renewal period, like renewable every 10 years to age 85 cost more than ones renewable to 65. Policies that are guaranteed renewable cost more than ones where you can re-enter with medical evidence. The level of guarantee in policies is a future cost to insurers and they price that in.
All life insurance costs the insurer the same even though the premiums can be different company to company. The probability of dying while owning a policy from company A is exactly the same as with Company B’s policy. Assuming they both have competent underwriters, if the premium from one of them is much lower it is because they are buying the business, (loss leader) with the expectation they will get more back later.
Insurance pricing can be low if the renewal at year 11 is much higher than the early higher priced contract. The one I looked at above renews in year 11 around $4,000 per year. A new one at that age could be had with medical evidence for about $1,200 year. Each person who is insurable should get new insurance. But some do not. If company B is charging $5,000 for the renewal they quickly recover any shortfall in the early years. And, not everyone is insurable by the end of ten years.
Escalating renewal premiums pushes lapses higher. Our 30 year old could expect to pay $71,000 per year at age 70 and $170,000 at age 80. No one every pays the age 80 premium. Some cannot afford it and others die from a heart attack when they see the bill.
Term insurance has a place, but you cannot rely on it to cover risks that have a long duration. There are better alternatives.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772