If you gamble you know the feeling you get when you walk away from the table either happy or frustrated. Your post-gambling emotional state relies, at least in part, on your attitude before you even get started. Are you trying to make money, or just have some fun? Term Life Insurance is kind of like that. However, it’s the bet you don’t want to win. It’s like a reverse lottery. You pay money in hopes it will never come back to your beneficiary.
Think of Term Life Insurance as a fee you need to pay when you have responsibilities; similar to taking a commuter train to work. You have a job for which you need reliable transportation. You pay a fee for a train ride so you can get to work and earn money. You understand that the transportation fee will never be returned to you, but you need to get to work, so you’re willing to pay it. The cost of a Term Life Insurance policy is a fee you pay when you realize that you have financial responsibilities and you are willing to open a policy for the greater good of protecting your loved ones.
I hope this short article will help you understand some of the pros and cons of Term Life Insurance. Once you have a grasp of what does and doesn’t work with this product, you can decide what’s most important to you as you seek to make the best product decision for your situation.
Inexpensive – Term Life Insurance is best known for its inexpensive premium. It is the cheapest form of life insurance.
Easy To Understand – Term is the simplest form of life insurance. If you continue to pay the premium, your policy continues to be in-force for the term period you have chosen. If you die during the term period of the policy, your beneficiary receives the death benefit proceeds*. However, if you are still living at the end of your term policy, one of five things can happen:
1. You may re-enter a new term policy with the same company (subject to their rules) with a premium increase based upon your age and health status at that time. If you don’t qualify, you will be denied a re-entry policy.
2. You may renew your current policy with the same company (subject to their rules) and pay a much higher premium, which will increase every year thereafter. This does not require a health exam or questionnaire.
3. You may convert your current Term Life Insurance policy to a Permanent Life Insurance policy with the same company (if available, and subject to their rules), at a much higher premium. This does not require a health exam or questionnaire.
4. You may replace your current Term Life Insurance policy with a policy from a different company (subject to their rules). If you qualify, your premium will be based upon your age and health status at that time.
5. Your Term Life Insurance policy will terminate.
Conversion Privilege – Many Term Life Insurance policies can be converted to a permanent policy without the typical health exam or health questionnaire. Some life insurance companies do not offer conversion. Conversion is important to someone who develops a health problem while insured with a term policy. Check to verify that your term policy has a conversion privilege. Typically, the conversion privilege does not add any cost to your premium.
Scheduled To Terminate – Similar to a lease, a Term Life Insurance policy is scheduled to terminate. If you still have a need for life insurance at the time your policy is scheduled to terminate, you will need to choose from the list of options described earlier in this article under, “Easy To Understand”.
Vulnerable To Lapse – Term Life Insurance is the most vulnerable to lapse. If you miss one payment, regardless of the reason, your policy will lapse after a 30-day grace period**. A few examples: 1) You move and forget to update your address information with the life insurance company, 2) You change your bank account and forget to update the life insurance company, 3) You lose your job and cannot afford the premium payment for a few months, 4) Your credit card is lost. You cancel it and order a new one. However, you forget to update the life insurance company.
Cannot Be Used As Collateral/Loan – A loan application often requests information specific to any life insurance policy you own. Lenders want to know if you have a policy which builds equity. They use this information to help measure the risk of lending money to a prospective borrower. They can also offer to loan money to a borrower using the equity in a life insurance policy as collateral. Term Life Insurance does not offer this benefit. It is pure protection, nothing more.
No Equity – If you don’t die during the term of your policy, you receive no benefit.
Many people feel that Term Life Insurance is similar to gambling. That can sound risky or exciting, depending on your perspective. However, if your family ever needs it, everyone will be glad you made that bet.
I think of it in terms of a fee that needs to be paid by people who understand their financial responsibilities, similar to other fees we are obliged to pay in life. However, if you prefer to think of it in terms of gambling, I have a heartfelt message for you: I hope you never hit the jackpot at the Term Life Insurance casino; may you forever have bad luck on that bet!
*Subject to certain exclusions, such as suicide. Your policy will disclose any and all exclusions.
**Check your State law for life insurance grace period requirements.