When life events occur such as getting married, having children, or buying a home, people assess/reassess their life insurance needs. For many physicians, the first step is typically purchasing a low cost term life insurance policy with a guaranteed level premium for 10, 20 or even 30 year term, that is both renewable and convertible. Let's take a closer look at term life insurance, followed by some commonly asked questions and one case study.
TERM LIFE INSURANCE
1. Does not accumulate cash value.
2. Is generally less expensive than permanent life insurance.
3. Offers a guaranteed level premium for a specified number of years.
4. Death benefits are generally tax free to the beneficiary(ies).
5. Offers renewable and convertible benefit options.
6. Does not offer a refund of your premium at the end of the policy period, unless you purchase a more expensive return of premium option.
6. Does not offer a refund of your premium at the end of the policy period, unless you purchase a more expensive return of premium option.
QUESTIONS/ANSWERS
Is there a difference in cost between the guaranteed level premiums for 10, 20 and 30 year term life insurance policy?
Yes, the longer period of time your premiums are guaranteed to be level , the more expensive the policy is. In this case, a 10 year term would be the least expensive and 30 year term the most expensive.
What does renewable mean?
Renewable term life insurance means that the policy can be renewed at the end of the term(i.e. 20 years) at the option of the policyowner and without evidence of insurability, for a limited number of successive terms (usually to age 95). The rates generally increase at each renewal(year) as the age of the insured increases. Caution: Please make sure your policy has the renewable option that does not require evidence of insurability in order to keep your life insurance coverage. Some insurance companies' term policies offer a renewable option, but require evidence of insurability to maintain existing coverage(re-entry) after the initial guaranteed term period ends.
Why is it important to have a renewable policy?
You want to make sure at the end of your term (i.e. 20 years) that you still have option to continue your life insurance policy. Yes, the premiums will go up, however even if your health has deteriorated/changed, you have the ability to keep your current policy or possibly convert it to a permanent life insurance policy.
If you do not have this renewable benefit, you have to apply for a new life insurance policy which will require you to go through medical underwriting again with no guarantee of being approved new coverage.
What does convertible mean?
By having the convertible benefit in your term life insurance policy means that the policyowner (i.e. you) has the option to exchange (convert) an existing term life insurance policy for a permanent life insurance policy without evidence of insurability. Life insurance companies usually limit the age (typically between age 40 and 60) at which you can convert your existing term policy to a permanent one, such as whole life, universal life or variable life.
Why is it important to have a convertible policy?
You may desire to have a permanent life insurance policy in the future, but cannot afford one now. You are also concerned that your health may change as you get older and you do not want to have to worry about being denied life insurance coverage because of deteriorating health. With the convertible benefit of a term life insurance policy, you have the option to convert to a permanent life insurance policy without any evidence of insurability.
Who is the policyowner?
The person who owns a life insurance policy. This is usually the insured person, but it may also be a relative of the insured, a partnership, a trust or a corporation.
CASE STUDY
In 1998 after one of my seminars, I met an 53 year old internist who was interested in obtaining term life insurance coverage to protect his family in the event of his death. He and his wife had recently had a child and he had began taking high blood pressure medication to control his hypertension. After reviewing his medical history, income, mortgage, and overall budget, we determined that a renewable and convertible term life insurance policy with a guaranteed level premium for 10 years would best meet his needs. Eventually, he was approved as a standard non smoker.
We reviewed his life insurance needs on a few occasions over the years, however, no changes were made until last year. His guaranteed level premium on his 10 year term life insurance policy was about to end and so adjustments were necessary. There was one problem.
A couple years ago, he had open heart surgery and therefore would not qualify for a new life insurance policy now. He was quite distraught, since he still had a big mortgage, wife that did not work and child that was in junior high school. Fortunately, I had advised him years ago to obtain the term life insurance policy which was both renewable and convertible. He was relieved.
We ended up converting his term life insurance policy to a universal life insurance policy with a slightly reduced death benefit, that ended up guaranteeing his premiums to be level for a longer period of time and for less premium than a comparative 10 and 20 year term life insurance policy. No medical evaluation was required.
This is a real life example of how important it is to have a term life insurance policy which is both renewable and convertible.
