By Lawrence B. Keller, CFP®, CLU®, ChFC®, RHU®, LUTCF of Physician Financial Services
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? This article will serve as a guide to help you purchase the right type of term life insurance at the lowest cost to meet your individual needs and goals.
What Is Term Life Insurance?
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.
Annual Renewable Term Life Insurance/Yearly Renewable Term Life Insurance
In the past, Term Life Insurance was typically purchased with an annually increasing premium rate known as “Annual Renewable Term” (ART) or “Yearly Renewable Term” (YRT), or with 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 (before Level Premium Term became available), I can tell you that my experiences with this product have been historically unpleasant. 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 can become 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 Permanent Life Insurance (such as Whole Life Insurance, Universal Life Insurance, Variable Universal Life Insurance or Equity Indexed Universal 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.
Level Premium Term Life Insurance
Level Premium Term Life Insurance policies are typically available with guaranteed level premium periods of 5, 10, 15, 20, 25, 30, 35, or even 40 years. This is the time in which premium rates are guaranteed to remain the same. One company makes policies available with level premium rates from 16-30 years (in one-year increments).
However, after the level premium period expires, most policies become annually renewable or the death benefit is significantly reduced. Therefore, in the same way as described above, premium rates can ultimately become cost-prohibitive and may limit the options available in the future.
Should You “Ladder” Your Term Life Insurance Coverage?
One 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 that amount.
However, as children age, as student loans and mortgages are paid down and educations are funded, short of estate planning, the need for long-term death benefit is also reduced.
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 coverage 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 and then 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 $2,952 annually. Using the “laddered” example above, the annual premium would be reduced to approximately $2,058, providing similar protection with an annual savings of $740 or approximately 27% less than purchasing coverage with long-term guarantees that might not be needed.
One carrier actually allows insureds to “ladder” their coverage within a single policy. The base policy purchased is the one with the longest guaranteed premium period and the additional coverage is purchased using Level Term Riders.** This can provide additional annual savings for each separate policy that would normally be purchased. Some other insurance companies waive the annual policy fee for any policy or policies purchased after the first – essentially, providing the same result. However, having separate policies can provide more flexibility since the policy owner cannot cancel the base policy (with the longer term) as the term riders are attached to it.
Typically, when working with clients, I compare the cost of purchasing policies from either the same or different companies in order to determine which strategy produces the most favorable outcome in terms of cost vs. benefits provided.
However, another relatively little-known strategy would be to purchase the policy with the longer guaranteed premium period and simply reduce the death benefit, as needed, over time. While this is more expensive compared to “laddering” coverage, if your needs change and you ultimately need the death benefit for a longer period of time than expected, you don’t find yourself potentially having to purchase additional coverage when you are older (and the premium rates are typically higher) or you may no longer qualify for the same underwriting classification that you did when your original policy was purchased.
Most term life insurance policies contain a conversion option. This option allows you to convert your term insurance policy into a permanent or “cash value” policy, regardless of your future health. The major advantage of this feature is that you maintain the underwriting classification in which your policy was originally issued. Therefore, assuming that you qualified for the best underwriting classification when your policy was purchased, the new policy would also be issued in the best underwriting classification, even if you would not qualify for it today based on your health.
Although most life insurance companies will allow you to convert for the entire guaranteed period in the policy, others may limit the conversion option to a specified period of time, such as the first five or ten policy years or allow you to add a rider (an Extended Conversion Rider) to the policy to extend the conversion period for the entire guaranteed level premium period.
If your goal is to ultimately convert some or all of your term insurance to permanent insurance, you should only purchase your policy from a company that has a reputation for offering a broad array of those types of policies. Otherwise, you may simply be better off with a company that specializes in low-cost term life insurance. Either way, it is important that you understand the conversion options available for the policies that you are considering before making your final decision.
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 you become disabled. Generally, it has a six month waiting period and, depending upon the insurance carrier, may have an “Own-Occupation” definition of total disability for up to seven years. 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 to consider this rider to 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 typically substantially higher compared with term life insurance—to be waived. Otherwise, if you plan on sticking with term insurance, you may want to forego this rider, because it is relatively expensive and will only waive the premiums associated with your (inexpensive) term life insurance policy.
Term Life Insurance Underwriting
Purchasing term life insurance is fairly 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 an 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.
For these reasons, you should consider employing the services of an experienced insurance agent who represents several companies to help you get the best rates, especially if your health is less than perfect. The agent will know which carriers are likely to provide you with a better underwriting classification, based on the specifics of your situation, to allow you to secure a lower premium rate. After all, using an agent or applying for the product online will not cost you any additional money.
Foreign Nationals (Visa Holders)
Insuring Foreign Nationals can be challenging. In fact, I can almost guarantee that even the most experienced Insurance Agent(s) have likely been surprised at one time or another by an underwriting outcome solely as a result of an insured’s citizenship or type of visa.
Insurance companies are looking for financial ties to the United States. A lot depends upon the type of visa they have, how long they have been in the United States, their country of citizenship (and in some cases, the country code assigned to their country of origin) and their intent to return to their country (and how often they plan to travel there). Some companies will even look to see if the Foreign National owns property in the United States and if other family members reside in the United States.
Underwriting can vary far and wide for Foreign Nationals. While one company might decline an application due to immigration or residency status, another may offer and approve the same insured in the best underwriting classification.
While many female physicians have had Gestational Diabetes in the past, it is of significant concern to the insurance companies from an underwriting standpoint. In the “best case” scenario, these individuals will qualify for the Standard Plus, Non-Tobacco underwriting classification (third-best underwriting classification), if offered by the specific insurance company. Others, which do not offer this classification, will use the Standard, Non-Tobacco underwriting classification, which typically results in a higher premium. In the past, one carrier would allow their best underwriting classification (Preferred Plus) as long as the other requirements were met to qualify. However, this has since been updated to be consistent with the rest of the industry.
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.
Some insurance companies are known to be more “generous” when it comes to their height/weight tables. These carriers may offer lower premium rates compared to those that are more restrictive in this area. Keep in mind that any weight lost within 12 months prior to applying for coverage will be added back by 50% and may impact the health classification you receive, and thus how much you pay for life insurance.
In many cases, those individuals that smoke 1-2 cigars per month can qualify for non-tobacco user premium rates. Those that smoke cigarettes, will receive either a Preferred Tobacco (if available) or Standard Tobacco underwriting classification,
There is one company that allows smokeless tobacco users (chewing tobacco/snuff, Nicotine patch or Nicorette® Gum users, electronic cigarettes and those that vape) to qualify for their Non-Smoker Plus underwriting classification.
Term Life Insurance with “Living Benefits”
Accelerated Death Benefit
This is a no-cost rider that allows you to access a portion of your death benefit prior to your death in the event of a qualifying terminal illness. The accelerated death benefit is treated as a lien, which may accrue interest. Upon the death of the insured, the death benefits payable are reduced by the total accelerated death benefit lien. If accessed, the insured may also be charged an administrative fee. This is a very common benefit and included in most Term Life Insurance policies.
Chronic Illness Accelerated Benefit
Depending upon the insurance company, this may be a no-cost rider that allows you to access a portion of your death benefit for conditions during which normal daily living is disrupted. The qualifying illness or conditions affect the ability to perform simple tasks like eating or dressing without assistance; or, they may also involve severe cognitive impairment that necessitates substantial supervision, such as Alzheimer’s disease.
The illness or condition does not need to be considered permanent, but must impair the insured where he or she is unable to perform at least two Activities of Daily Living (ADLs) such as bathing, eating, dressing, toileting, transferring and maintaining continence.
Critical Illness Accelerated Benefit
Critical illnesses often come suddenly and without warning, and the financial impact can be life-changing. A Critical Illness Accelerated Benefit can help reduce the financial impact of qualifying critical illnesses or conditions such as a major heart attack, coronary artery bypass, stroke, major organ transplant, end state renal failure, paralysis, coma, severe burn, invasive cancer and blood cancer (Leukemia, Lymphoma, Multiple Myeloma and Myelodysplastic Syndromes). Again, depending upon the insurance company, this rider may be included in the policy at no cost.
Accelerated Benefit Riders are optional and may not be available in all states. Receipt of Accelerated Benefits may be taxable and may affect eligibility for public assistance programs such as medical assistance (Medicaid), Aid to Families with Dependent Children, and Supplemental Security Income. Prior to applying for Accelerated Benefits, policy owners should seek assistance from a qualified tax advisor and consult with the appropriate social services agency concerning how receipt will affect the eligibility of the recipient and/or the recipient’s spouse or dependents.
Financial Ratings of the Insurance Company
Check the financial ratings of the insurance company or companies that you are considering. Although insurance companies infrequently become insolvent, it does happen, so you need to make sure that you buy a policy from a company that will be around for a long time. You can get information about insurance companies from several major insurance-rating services.
The ratings services might include A.M. Best, Standard & Poor’s, Fitch, Moody’s and Weiss.
Ratings are merely opinions based on quantitative and qualitative data interpreted by insurance industry and financial experts.
One popular way to evaluate a life insurance company is to consider its Comdex score.+ The Comdex rating is on a number scale of 1 to 100 with a higher number being the better ranking. If an insurance company’s Comdex ranking is 80, this means it scores higher than 80% of all other insurance companies with multiple ratings. An insurance company must have ratings from at least two insurance rating organizations to have a Comdex ranking. However, you must keep in mind that Comdex is not a rating itself, but a composite of all ratings that a company has received from the major rating agencies (A.M. Best, Standard & Poor's, Moody's, and Fitch).
For the most part, term life insurance is a commodity, so the pricing is very competitive and comparison shopping is easy. The type of term life insurance that should be purchased depends on factors such as your age, health, budget, and your long-term financial plans. If you are considering the purchase of a new life insurance policy, or if you are replacing an existing policy, it is best to consult with a knowledgeable insurance agent who represents several companies. He or she can review your situation and can then help you make intelligent and informed choices regarding your life insurance protection.