Q&A - Answers to basic questions No. 22 to 26
22. Is term insurance really the least expensive protection?
Term life insurance can be the least expensive form of life insurance for someone who needs protection only for a limited period (say, only until the kids grow up), or for someone who is going to die soon. It requires the lowest premiums today, but the problem is that the guaranteed renewal rates at the end of the (5, 10, 15, maybe 20) year period (if they exist at all) jump to a quite significantly higher level. If, however, the person will be in good health at the end of the first period, he / she can shop around again and buy a new policy for substantially less than the guaranteed price. If this is not an option, the guaranteed premium (and paying more on the long run than would have been the case with a permanent policy) is still better than being unable to obtain insurance at all.
All in all, premium-wise it's probably the best to stick with term insurance, for most people. The main deficiency of term insurance is that it can be outlived. In other words, it cannot be renewed after a certain age, usually 70 or 75, but never after age 85. If the intention with the coverage was to fund estate taxes, it's simply inadequate. One can start with term insurance even in those cases, but switch to permanent insurance will probably be needed. The later that switch happens, the higher the premium payable in the new policy.
Term policies have no cash value, and cannot be connected with tax-deferred savings. The creation of such a tax-shelter can be a good enough reason in itself for many people to buy insurance. It can be demonstrated that the tax advantages of such savings for these people, compared to other investment choices, do more than compensate for the cost of insurance itself. In these situations, and in this particular sense, it's not nonsense to speak about free insurance, with which even the lowest premium term policy cannot compete.
23. What else other than price should I watch for when buying term insurance?
Factors to consider when buying term life insurance include:
- Is the policy renewable? Even if you think today that you will not want to renew your policy, it's a good idea to leave this option open, in case your situation and / or intention change. There exist some nonrenewable term policies that are less expensive than the renewable ones, but the difference is very small, making these nonrenewable policies not good choices.
- Is the policy non-cancellable? If not, you are giving up a lot of control of your situation. This is perhaps the main weakness of various group policies.
- Are the premiums guaranteed, and for how long? Good quality term policies guarantee not just that you can buy protection for consecutive periods, but also the premiums payable in those periods.
- How competitive are the future premiums? For a policy that is the least expensive today the company may charge much higher premiums in consecutive terms than what you would pay for another policy that starts perhaps with slightly higher premiums.
- Is the policy convertible to a good quality permanent policy? Many people who cannot afford more than a term policy today may want to turn it into permanent protection, estate planning, tax-deferred investment. Even if your financial or family situation allows or suggests such a change later, deteriorated health may prevent it. Why not to select a policy in the first place which guarantees that you can make the change later, irrespective of health status?
- Are there living benefit options guaranteed in the policy? ... meaning that in case of a critical or terminal illness, part of the death benefit can be paid before death.
- Is the insurance company reputable, financially stable? There are better information sources regarding this question than familiarity with some 'big names' from the mass media.
- Are there saving opportunities on administration cost if more than one life is protected?
I strongly suggest you to visit a most useful site of Compulife, a term comparison software company. There, you can run a tailor-made illustration for yourself, and together with the cost information, you will get a list of factors to consider when buying insurance.
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24. Why should I give up my mortgage insurance from a bank for a good individual policy?
A good example for how big mistakes uninformed people can make is the fact that many home buyers accept the insurance offered by banks when they get a mortgage. These people most probably pay much more than what an individually owned life insurance would cost, and to make it worse, they get much lower quality protection for the higher premium.
The insurance from the bank is a kind of group policy under the control of the bank. The policy might terminate when you don't want it to terminate, the premiums are not guaranteed, the benefit is paid to the bank and not to your family if you die, ... and there are several other factors that all lead to the conclusion: The policy from the bank protects mainly the bank, and much less your family. It is in your best interest to shop around and buy individually owned policy from some good insurance company, even if you have already made the blunder of buying from the bank. There is nothing that would prevent you to terminate that low quality and expensive coverage once you got your individual application approved.
If you want to see a more detailed comparison of the two options, click here.
25. What are the price / premium differences among various companies?
Differences in costs of very similar or same protection from various companies are much larger than what most people would presume. It's not always easy to find the least costly policy, because
- there is no company that could offer the lowest premium to everyone, for every type of policy, and for all the time. One policy can be very well priced for younger people, another for smokers, and a next one for women, for example. The company / policy that was the best half a year ago may have slipped a little bit behind since then.
The premium differences are sometimes twofold or more, therefore shopping around is a common sense approach. With term insurance, where has been a declining trend in premiums, due to competition and improving mortality, recently, it's not a bad idea to shop around even if you bought your existing policy a few years ago.
26. What are the big attractions in universal life insurance?
There are several strong points in universal life insurance policies that make it very advantageous for many people, especially for high income earners. These advantages are built mainly around the following features:
- tax-advantaged treatment of investment under the umbrella of an insurance policy,
- tax-free nature of insurance benefits,
- use of assets accumulated in a universal life policy as a collateral,
- creditor-proof quality of assets in the policy,
- good investment options, guarantees and bonuses,
- flexibility and control of own money (as opposed to traditional whole life policies, e.g.)
- ability to decrease cost of insurance (of various kind) by paying for it with before-tax money
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