Financial Advice for Retirement, Social Security, IRAs and Estate Planning

Term Insurance: New Developments

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Term life insurance is one of the simplest and least glamorous insurance products. It also is a work horse and, unknown to most, has become quite a bargain in the last few years. If you have not reviewed your policies in a few years, or if you didn’t buy in the past because it was too expensive, take a look at what is available now.

In a term life policy, the insured is covered for a fixed period. If he or she dies in that time, the policy benefits are paid to the beneficiary. If the insured does not die prematurely, the policy lapses. The insured owes nothing and receives nothing. Term insurance is appropriate for insurance needs that will expire at some point, such as paying for a mortgage or college expenses or providing a nest egg for a spouse until you have saved enough.

The good news is that premiums on term insurance have dropped substantially in the last decade, and even in the last five years.

One reason for the price decline is longevity. People are living longer, so the cost of insuring them is lower. In addition, competition among insurers has increased, pushing down prices. (The irony is that a few years ago changes in insurance regulations were forecast to substantially increase term insurance premiums.)

A big reason for the premium reduction is technology. Insurers are much more sophisticated about assessing risk. They used to look simply at age, sex, and smoking history. Now, many insurers evaluate factors such as cholesterol levels, residence, education, marital status, occupation, and more. Even credit history can influence insurance premiums. Insurers believe that their databases and statistical techniques allow them to better pinpoint the risks of insuring a person, and they can better price policies. That results in lower premiums for most people.

Today, even people in their 50s and 60s can obtain low-cost term insurance policies if they are in relatively good health.

Anyone who has a term policy more than a couple of years old should check today’s rates. People with policies five years or older might find they can increase their coverage and still pay lower premiums.

Another change in term insurance is the return of premium policy.

Many people are bothered by the notion that they receive nothing back when the policy expires. That does not bother them with auto and homeowner’s insurance but does with term life. To combat this, some insurers offer return of premium term life.

Under return of premium, the insured gets all or most of the premiums back if he is alive when the policy expires. That can sound attractive, but the details are less appealing.

A return of premium policy has premiums about 50% higher than for regular term. Most people would have more money if they bought regular term and invested the difference between the two premiums. Even a modest investment return leaves the insured with more money than under return of premium.

In addition, insureds who let the policy lapse in the first five years or so generally receive nothing. They pay higher premiums for no benefit.

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