Insurance
For younger people, this is generally the cheapest kind of life insurance in terms of actual cash on a year-to-years basis. As such, it is often the policy of choice for young families with large insurance needs and modest incomes.
Term insurance is “pure” insurance. It has no savings or investment component, unlike whole life and universal life, which are described later. With term insurance, insurance company statisticians figure out the probability of youth death and set a rate that, when large numbers of people buy insurance, covers all the benefits that will have to be paid out.
Term insurance is “pure” insurance. It has no savings or investment component, unlike whole life and universal life, which are described later. With term insurance, insurance company statisticians figure out the probability of youth death and set a rate that, when large numbers of people buy insurance, covers all the benefits that will have to be paid out.
Term insurance is often sold on an “animal renewable” basis. Every year the policy expires and you have the option of renewing. But every year the policy will be more expensive. At age twenty-five, you may pay little more than $1 for each $1,000 of coverage you get. (Women always pay less than men, because they like longer, and many companies offer special rates to nonsmokers, because they live longer too.) At age forty, you may pay almost $2 per $1,000. At age sixty, you may pay more than $7 per $1,000. As you enter old age, the cost of term insurance eventually becomes prohibitively high, but you may no longer need insurance by then.
Term insurance can also be purchased for longer terms-typically five or ten years-during which the annual premium will remain level. Since your risk of dying rises each year, the actual cost of insuring you also rises inexorably every year as you age. But with these extended-term policies, the insurance company manages to keep the premium level by charging you more than is required during the early years and holding that money to help pay the amounts required in later years, when your probability of dying has risen. If you renew the policy when it expires after five or ten years, the annual premiums will generally jump up.
Another variation on term insurance is “decreasing term,” where you pay the same premium every year, but the size of the death benefits goes down. Mortgage insurance, which many lenders require home buyers to purchase, is actually a form of decreasing-term insurance. The face value of the policy decreases year by year, in step with the remaining balance on the mortgage instantly becomes available. (Similar “credit insurance” policies are available to pay off other kinds of indebtedness.)
These policies protect the borrower’s family, but they also protect the mortgage lender. If you have the options not to buy mortgage insurance, it is often a good idea to opt out. Instead of buying a separate policy earmarked for your mortgage – a clear case of “pocket accounting” – you should include your family’s housing expenses in your calculation of your total insurance needs and make sure these expenses are covered by whatever policy you do buy. You may end up getting the equivalent of mortgage insurance at a lower rate (a $200,000 policy costs less than two $100,000 policies). Moreover, your survivors will have the choice of paying off the mortgage immediately or simply continuing to make the monthly payments. If you’ve got a mortgage with a low interest rate, there is no reason to rush out and pay it off. An insurance beneficiary might well be better off continuing to make the monthly payments while investing the rest of the insurance proceeds at an attractive return.
Regular term policies are offered with a wide range of options. Two common and valuable ones are the automatic right of renewal up to age sixty-five or seventy, regardless of what happens to your health, and the right to convert your policy to whole life insurance, again regardless of the future state of your health. Another potentially valuable options is known as a “waiver of premium.” This provides that your insurance will continue in force, with no further premium payments from you, if you become disabled.
One option you don’t want is “double indemnity.” This doubles the death benefits if you die as a result of an accident or violence instead of disease. There is, however, generally no reason why your dependents’ needs should be any greater if you are killed by a runaway oxcart than if you die of double pneumonia. The extra charge for double indemnity is better spent buying a slightly larger policy without that feature. Similarly, you should avoid “accidental death and dismemberment” policies unless you are planning to fall off a cliff soon. Such policies are cheap, but they pay nothing to your survivors’ if you die of natural causes, as most people do. Remember that the cause of your death may be interesting to the coroner, but not to your collectors.
Whatever you buy, shop around. Term insurance rates vary widely from company to company. You may also find that if you have any kind of medical problem, some companies may insist on charging you extra, while others will not. To learn more about prices, you can ask representatives of various insurance companies, and can ask representatives of various companies, and you can also turn to on-line services that will help you search for the lowest price quote. You should also follow up on the brochures you receive from fraternal organizations, alumni associations, and assorted other clubs that offer life insurance to their members.
Term insurance can also be purchased for longer terms-typically five or ten years-during which the annual premium will remain level. Since your risk of dying rises each year, the actual cost of insuring you also rises inexorably every year as you age. But with these extended-term policies, the insurance company manages to keep the premium level by charging you more than is required during the early years and holding that money to help pay the amounts required in later years, when your probability of dying has risen. If you renew the policy when it expires after five or ten years, the annual premiums will generally jump up.
Another variation on term insurance is “decreasing term,” where you pay the same premium every year, but the size of the death benefits goes down. Mortgage insurance, which many lenders require home buyers to purchase, is actually a form of decreasing-term insurance. The face value of the policy decreases year by year, in step with the remaining balance on the mortgage instantly becomes available. (Similar “credit insurance” policies are available to pay off other kinds of indebtedness.)
These policies protect the borrower’s family, but they also protect the mortgage lender. If you have the options not to buy mortgage insurance, it is often a good idea to opt out. Instead of buying a separate policy earmarked for your mortgage – a clear case of “pocket accounting” – you should include your family’s housing expenses in your calculation of your total insurance needs and make sure these expenses are covered by whatever policy you do buy. You may end up getting the equivalent of mortgage insurance at a lower rate (a $200,000 policy costs less than two $100,000 policies). Moreover, your survivors will have the choice of paying off the mortgage immediately or simply continuing to make the monthly payments. If you’ve got a mortgage with a low interest rate, there is no reason to rush out and pay it off. An insurance beneficiary might well be better off continuing to make the monthly payments while investing the rest of the insurance proceeds at an attractive return.
Regular term policies are offered with a wide range of options. Two common and valuable ones are the automatic right of renewal up to age sixty-five or seventy, regardless of what happens to your health, and the right to convert your policy to whole life insurance, again regardless of the future state of your health. Another potentially valuable options is known as a “waiver of premium.” This provides that your insurance will continue in force, with no further premium payments from you, if you become disabled.
One option you don’t want is “double indemnity.” This doubles the death benefits if you die as a result of an accident or violence instead of disease. There is, however, generally no reason why your dependents’ needs should be any greater if you are killed by a runaway oxcart than if you die of double pneumonia. The extra charge for double indemnity is better spent buying a slightly larger policy without that feature. Similarly, you should avoid “accidental death and dismemberment” policies unless you are planning to fall off a cliff soon. Such policies are cheap, but they pay nothing to your survivors’ if you die of natural causes, as most people do. Remember that the cause of your death may be interesting to the coroner, but not to your collectors.
Whatever you buy, shop around. Term insurance rates vary widely from company to company. You may also find that if you have any kind of medical problem, some companies may insist on charging you extra, while others will not. To learn more about prices, you can ask representatives of various insurance companies, and can ask representatives of various companies, and you can also turn to on-line services that will help you search for the lowest price quote. You should also follow up on the brochures you receive from fraternal organizations, alumni associations, and assorted other clubs that offer life insurance to their members.
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