[Editor's Note: The following guest post was submitted by insurance expert and long-time advertiser, Lawrence B. Keller, CFP®, CLU®, ChFC®, RHU®, LUTCF. Larry has written extensively about disability insurance in the past for WCI but today he gives us an “insurance guy's” perspective on what to look for when purchasing term-life insurance.]
Over their careers, physicians generally purchase large amounts of term life insurance. Term Life insurance, for the most part, is a commodity, so the pricing is very competitive and comparison shopping is easy. So, why is it that so many physicians have the wrong type of term life insurance and/or are paying significantly higher premiums than they should be for their policies?
Term life insurance provides pure insurance protection and does not build cash value. It allows you to purchase the largest death benefit while minimizing your initial premium outlay. When you purchase a term life insurance policy, you are buying coverage for a specified period of time. If you die within the term of the policy, the insurance company will pay the death benefit to your beneficiary or beneficiaries.
While I am probably best known for my expertise in disability insurance, I am also often asked to review existing life policies. This post will focus on things that I take into consideration while evaluating existing policies and/or reviewing illustrations that have been presented when new coverage has been proposed.
Top 7 Things I Consider When Evaluating Term Life Policies
1) What type of policy was purchased?
Term Life Insurance typically is purchased with an annually increasing premium rate (known as “Annual Renewable Term” (ART) or “Yearly Renewable Term” (YRT) or a Level Premium Term, where premium rates are guaranteed* for a specific period of time.
However, unlike Level Premium Term (the most popular type of term life), this product has an indeterminate premium structure. This means that there are two sets of premium rates: a “non-guaranteed” Scheduled Premium rate and a “guaranteed maximum” premium rate (and the guaranteed maximum is typically a multiple of the Scheduled Premium rate). Generally, after the first policy year, the annual premium payable may be more than the scheduled renewal premium, but it will never be more than the guaranteed maximum renewal premium (similar to an Adjustable Rate Mortgage).
As an agent that sold a large amount of ART/YRT policies in the past (before Level Premium Term became available), I can tell you that my experience with this product has not been favorable. In my opinion, it is the equivalent of “lighting the fuse and hoping you can run away fast enough before your legs blow off” as it becomes prohibitively expensive over time.
As a result, very few companies still offer this type of coverage. In many cases, it is sold for very short-term needs (a loan that needs to be insured but will be paid off quickly) or for an insured that knows that they ultimately want to purchase Whole Life Insurance and are simply purchasing this product as “pre-conversion” term. However, more often than not, this is not the goal of the insured and they, in fact, typically, don’t realize that they are purchasing this product for this specific reason.
2) When was the policy purchased?
Level Premium Term Life Insurance policies are typically available with guaranteed level premium periods of 10, 15, 20, 25 and 30 years. One company makes policies available with level premium rates from 16-30 years (in one-year increments), as well as, a 35-Year Level Premium Term policy.
How many years with a level premium remain? For example, if a 20-Year Level Premium policy was purchased 10 years ago, 10 years remain with a level premium rate. How does the cost of a new 10-Year Level Premium Term (the number of years remaining with a level premium) compare to what the insured currently owns?
3) What underwriting classification was the policy issued in?
Purchasing term life insurance is pretty straightforward. Insurance companies look at age, height and weight, personal medical history and immediate family (mother, father, brother, sister) history of cardiac disorders or cancer. Some carriers ignore immediate family history of cancer altogether, others take a diagnosis of cancer or cardiac disorders in a parent or sibling prior to the age of 60 into consideration and may prevent the proposed insured from qualifying for the most favorable underwriting classification while others only take this family history into consideration if it resulted in death.
So, if the policyholder did not qualify for the most favorable underwriting classification with the company from which the policy was purchased, could they potentially qualify for a more favorable underwriting classification elsewhere and, pay a lower premium as a result?
4) Does the policy include a Waiver of Premium Rider?
This rider is designed to have the premiums of the policy paid for by the insurance company (waived) in the event of your disability. Generally, it has a six month waiting period and for the next year and a half (total of two years) or, in some cases next four and a half years (total of five) years will allow your term life insurance policy’s premiums to be waived. However, after this time, you must be unable to perform any occupation that is “reasonable” based upon your education, training and experience.
Again, if your goal is to ultimately convert some or all of your term life insurance to permanent life insurance, like Whole Life, it is important that this rider be included in your term life insurance policy. This way, when you convert to a permanent insurance policy, it will allow the premiums—which are substantially higher compared with term life insurance—to be waived. Otherwise, if you plan on sticking with term insurance, you will want to forego this rider, because it is relatively expensive and will only waive the premiums associated with your (inexpensive) term life insurance policy.
5) Does the policy include an Extended Conversion Rider?
Some policies allow for the conversion to permanent insurance (like Whole Life Insurance) for the entire guaranteed premium period. Other policies, however, may have a limited conversion option (typically five years) in order to reduce the premium rates for the policy. If one does not have the desire to convert their term policy to permanent insurance, this is likely something that can be removed from the policy in order to reduce the premium rate.
6) Does the policy include an Accidental Death Benefit Rider?
Personally, I never understood this rider and would not be willing to pay for it myself. Why would your family need more money if you died peacefully in your sleep or died as a result of an accident? You should simply determine the amount of coverage your family needs in the event of your death and purchase that amount of coverage. Term Life insurance is inexpensive. At worst, you overestimate the amount of coverage and simply reduce the death benefit should your needs change.
7) Should the coverage be “laddered”?
A good rule of thumb when purchasing term life insurance is to replace 7-10 times your gross annual income. In many cases, physicians will simply determine the amount of coverage that they need or want and purchase a 30-Year Level Premium Term Life policy in this amount.
Let’s use a $4,000,000 death benefit as an example. What about purchasing $3,0000,000 of coverage with a 20-Year Level Premium and $1,000,000 of death benefit with a 30-Year Level Premium instead? In this example, the insured would have the same $4,000,000 death benefit for his or her family for the first 20 years. It would then decrease to $1,000,000 for the remaining 10 years.
For comparison purposes, the cost for $4,000,000 of 30-Year Level Premium Term Life Insurance for a 35-year-old male in New York State obtaining the best underwriting classification would be approximately $2,960 annually. Using the “laddered” example above, the annual premium would be reduced to approximately $1,938, providing similar protection with an annual savings of $1,022 or approximately 35% less than purchasing coverage with long-term guarantees that might not be needed.
One carrier allows insureds to “ladder” their coverage within a single policy. The base policy purchased is the one with the longest duration and the additional coverage is purchased using Level Premium Term Riders. This provides an annual savings of $60 for each separated policy that would normally be purchased.
Examples of Policies
Here are three examples of policies that I recently reviewed, my recommendations and the outcomes:
- A $3,000,000 10-Year Level Term policy was purchased 5 years ago by a 28-year-old male physician. Also included was a Waiver of Premium Rider, as well as, an Extended Conversion Rider. The total annual premium was $988.55 ($785.00 for the death benefit, $180.00 for the Waiver of Premium Rider and $23.55 for the Extended Conversion Rider).
This client was paying $180.00 annually to waive an annual premium of $785.00. This represented 24% of the cost of the death benefit. Clearly, not a good value for the premium dollar when this premium could be used to increase his personal disability insurance coverage or invested elsewhere.
The cost of the Extended Conversion Rider represented 3% of the cost of the policy. Since this client did not have any interest in converting to cash value insurance, it also did not make sense in his situation.
A new $2,000,000 20-Year Level Premium policy was purchased from another carrier, at age 33, with an annual premium of $764.00. He did not feel that $3,000,000 of coverage was needed as he was part of a dual physician couple.
- A $1,000,000 Annual Renewable Term (ART) policy was purchased by a 44-year-old female physician. The (current) annually increasing premium was $664.00 annually. While she ultimately decided to increase her total death benefit and “ladder” her coverage, the annual premium for a $1,000,000 15-Year Level Term Rider was $549.99. Therefore, she was able to reduce her annual premium for this portion of her coverage, as well as, lock into the lower rate for 15 years.
- A $2,000,000 30-Year Level Premium Term policy was purchased by a 33-year-old male physician six years ago. Unfortunately, at that time, he did not qualify for the best underwriting classification. As a result, the annual premium was $2,717.04. Knowing that another carrier would potentially allow him to qualify for the best underwriting classification if he met the criteria, he applied at age 39 for $2,000,000 of 20-Year Level Premium Term Insurance. The policy was approved with an annual premium of $1,094.54. Since he was also part of a dual physician couple and 24 years remained (of the original 30 year) on his existing term policy, he and I no longer felt that a 30-Year Level Premium Term policy needed.
As you can see, there are a number of reasons to potentially review your existing coverage to make sure it still meets your needs, goals, budget and individual circumstances. In many cases, a lower premium rate might be obtained – especially if your situation has changed since the time the policy or policies were originally purchased.