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5 Different Types of Term Life Insurance for Families and Individuals
Level Term Insurance is generally meant to last for a specific amount of time, unlike Permanent Whole Life or Guaranteed No Lapse Universal Life that is designed to last up to ages 100 through 121. It’s typically sold in 5, 10, 15, 20, 25 or 30 year terms. During this period of time, the rate and the death benefit are guaranteed to remain level and not increase or decrease.
You can think of term insurance as the purest form of life insurance. There is no cash accumulation to borrow from, withdraw or get back when the policy ends. It’s also the least expensive way to be insured. Term insurance should not be used to cover “Final Expenses or Burial Expenses” because you can ultimately outlive the policy which the insurance companies are banking on. If you only want life insurance to cover burial expenses and tie up a few loose ends like credit card debt, a small permanent policy like Whole Life or Lo Lapse Guaranteed Universal Life from $5,000 to $25,000 is the appropriate kind policy you should purchase.
Laddered Term Life is a fairly new strategic way to have varying amounts of coverage for different lengths of time. Banner Life, a Legal & General America company, offers a rider that you can add to your base policy which allows you to choose different amounts for certain lengths of time all within one single policy. Below is a description of a person who could benefit by “Laddering” Term policies. This can could not only save money, but also allow the person to be insured for the proper amounts for specific amounts of time.
• Your youngest child is currently 2 years old. Between the cost of raising the children and their college educations you estimate $500,000
• You just purchased your first home, have a 30 year mortgage for $300,000 and you are the sole income earner.
• You currently earn $80,000 per year, but it will soon increase to several hundred thousand.
• You plan to retire in 35 years, should not have any significant amount of debt, your home with be paid off, and your spouse can live comfortably on retirement income if you die after you retire.
Laddered Term Life should save you a good amount of money over time because all the different death benefits and term lengths are within one policy. This can be a major cost savings over the years for two reasons: , you will only pay one policy fee and you are only purchasing the amounts you need for the time periods you need it for. If Banner Life isn’t a good fit, we can ladder policies with any companies individually.
Level Term with a Return of Premium (ROP) is a variation of Term Insurance. A Return of Premium Level Term policy includes an increasing percentage of paid premiums to be refunded based on how long the person keeps the term policy ultimately refunding 100% of the premiums paid if the policy owner keeps it in force for the full length of the term. Level Term with a ROP can be an alternative for the life insurance buyer who just can’t imagine paying for life insurance and never getting anything back.
There are certain instances that a Term with Return of Premium can make sense. An ROP policy can be a good way to make sure that there is money set aside for funeral expenses after the term has ended. Only a handful of companies still offer this product and you could expect to pay two to four times more than a traditional level term. Five years ago it was a great deal, today they are usually priced too high.
Renewable Term (RT ) will renew every year or possibly every 5 years at a new predetermined premium. The premiums increase in small amounts and it’s renewed without any type of medical or financial underwriting As long as the policy holder wants to accept the new premium, it’s automatically renewed. In actuality, almost all Term Life Insurance Policies for Families and Individuals can be renewed, but at the end of your initial term, you can expect the premium to be five to ten times the amount you initially purchased it for.
RT policies are usually purchased by two different types of consumers. It is by far the most widely utilized type of life insurance provided by an employer. It may be provided to you free of charge and usually is somewhere between two and three times your salary, or a small amount like $10,000. More times than not, when your employment ends, so does that life insurance. If you ever had life insurance provided by or through an employer, you probably noticed that the premiums increased little bit each year which is because you got a year older.
The other consumer is the one who purchases a policy without the assistance of an insurance agent by calling into the company or sending back an application that was part of a mass mailing “direct to consumer “. These products include companies like Globe Life, AAA, or the New York Life AARP products. The premiums look attractive in the beginning, but many people have to drop the policies when the premiums start increasing.
Decreasing Term, sometimes referred to as Mortgage Term Insurance has become a dinosaur. Term insurance was originally created to protect the spouse and family from losing their home in the event that the income earner died. The death benefits decreased over the period of time the mortgage was being paid because the loan was being paid down. The idea of Laddering, Staggering or Stacking has replaced the need to look for decreasing term insurance and Laddered Term is a more effective way to purchase life insurance based your anticipated life events.
If you are a new home buyer, raising children or have a spouse that depends on your income, you should probably have some type of Term Life Insurance until your financial obligations have been met. So If you have 20 years left on the mortgage,and you’re financially responsible for your children for the next 18 years, then you would purchase a twenty year term. However, as time goes on, your financial obligations should decrease, thus needing less coverage.
Mortgage protection is usually just one reason young families should have Term Life Insurance. You need to consider the cost of raising children, saving for college education, contributing toward retirement and supporting your spouse before retirement. All of these life events will eventually end at different times which takes me back to Laddering Term Life policies.
Not all Level Term Policies Guarantee the Rates for the Full Term
There are a few companies that offer a variation where the rates are only guaranteed for a portion of the term, so make sure you know what you’re buying. If you are working with an agent, we strongly recommend you ask the agent if the rates are guaranteed for the full term. We have found that the majority of companies selling these types of Term policies are being sold by companies that employ “Captive” or “Career” agents.
If an agent is not independent, then they can only sell a particular company or handful of companies offered by their employer or “Up-line”. The Captive or Career agent may be presenting a policy that doesn’t guarantee the full term, because it is the only type of term policy he or she has to offer. I have nothing negative to say about Career or Captive agents, they just can’t shop the rest of the market for you.
Don’t get me wrong, there is nothing wrong with paying a little more to if you prefer to be with an agent that was referred to you by a friend, has an office down the street or that works for a company with a highly recognizable name.
It’s really a matter of your comfort level. Unless it is a very special situation, you probably should not agree to take a policy that is not guaranteed for the full term of the policy. It likely won’t save you any money in premiums because there are so many companies that only sell Term Life Insurance for families based on guarantees for the full length of the term.
What is a Policy Fee?
Policy fees are built into the cost of the policy, so when you request a quote, you’ll know the total cost. A policy fee is always listed on the Schedule page of your policy or somewhere on the brochure that lists the product features. It’s usually going to be anywhere from $25 to $75 per year and is used toward paying administration costs of the policy. Don’t get caught up that the insurance company is charging a “Fee”. The few companies that don’t charge a policy fee typically make up for in the rates. In other words…Don’t bite your nose to spite your face!
Term Life Insurance can be paid for on a monthly, quarterly, semi-annual and annual basis. You will likely save a few bucks if you pay one time a year rather that breaking it up into payments. If you can swing it, choose annual, but monthly usually adds about 3% to 5%. Take for example the cost of a $2M 30 year term paid for annually costs $1,326.80. If you paid for that same policy monthly, it would cost $1,392.20. You would save $1,992 over a 30 year period. Don’t beat yourself up if it’s too difficult to pay one time a year. Start out with whichever way is easiest, and if you want to change it to a different mode, just call your independent agent, and we’ll make the change for you.
Life Insurance companies have moved away from generating paper bills on a monthly basis. Nearly all of them require you to pay by automatic bank draft from a checking or a savings account if you want to pay monthly. Automatic deductions don’t seem to be an issue anymore as most Millennials and Gen Xers Life life insurance buyers pay their bills that way anyway. If you don’t like the idea of a company have the control, then you can always pay quarterly, semiannually or one time a year and pay buy writing a physical check.