Term Life Insurance

Term Life: Insurance shoppers are often enticed by the promise of "cheap" term life insurance. Term life is, at least initially, very inexpensive. However, it doesn't last forever, and if you will need insurance at the end of the term, you may find yourself wishing you had given some consideration to the future.

Term life has no cash value, so you can’t borrow against it or cash surrender it. If you stop paying for it, you lose it.   While it may seem attractive, at the end of the term the premium will increase by 300% or more and will continue to increase every year. At that time, you will also discover that your life insurance rates for any other kind of policy will be much higher than they would have been at the time you purchased the term. Of course, you will be told that you can “convert” the policy. Conversion in many cases means becoming "annual renewable" unless you purchase from a company with universal or whole life options.  When you convert, your premium will be adjusted to your age at that time.  Often it is less expensive to simply purchase a new policy with a different company, but, health issues in later years may limit your ability to purchase a new policy. Unless you have a reason to believe that you will not need life insurance in later years, you probably want to look at some other options.

Advantages of "Term"
Term life is appropriate for some people. Due to the low cost, it allows you to provide a higher benefit for a growing family or for protection of a mortgage. It also allows you to add a variety of riders such as spouse and child term riders. The riders on a spouse and on children can also be converted without medical underwriting in later years.

Buy Term and Invest the Difference
This slogan was popular in the mid 1900s as agents teased lower income buyers with the idea of purchasing something very inexpensive and using the difference between Term and whole life to invest as a part of their retirement. Of course, the vast majority of buyers needed the “difference” for other purposes, so few investment accounts were set up.  Those who took this route, assuming that in later life they would have “investments” to pay for final expenses and therefore would not need life insurance, unwittingly dumped a tax surprise onto their beneficiaries. If the money was invested in a retirement instrument such as a qualified IRA account, the beneficiary stood to lose not only the retirement funds to final expense costs, but also the income tax on a qualified distribution. Additionally, the beneficiary would also pay higher taxes on their own income since their income would be higher in the year they took the distribution. If a person placed the difference in “non-qualified” investments such as mutual funds, stocks or CDs, he or she received a 1099 every year and thus paid tax on the growth of the funds. This tax could be much more than the cost of insurance for having a whole life policy.

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