Coming To Terms With Your Term Life Insurance
Physicians, as a whole, tend to be quite altruistic, putting others ahead of themselves often.
Ensuring the financial well being of your loved ones in case something happens to you scores very high on the altruistic scale in my opinion.
We all know that if we have loved ones who depend on us financially we need to be adequately insured.
However with the multitude of insurance options out there it can be quite intimidating.
Some of the terminology found in insurance plans can seem like a foreign language and we often blindly trust the insurance salesperson to look out for our best interest (which may not always be the case with horror stories of young doctors being pushed into whole life insurance, etc).
I was thus very excited when Lawrence Keller offered the following post to help clarify some of the details of the most popular type of insurance, Term Life.
[Disclaimer: Lawrence B. Keller is a paid sponsor of this blog and thus we do have a financial relationship]
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 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 experience with this product has been 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 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.
Level Premium Term Life Insurance
Level Premium Term Life Insurance policies are typically available with guaranteed level premium periods of 10, 15, 20, 25 and 30 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), as well as, a 35-Year Level Premium Term policy.
However, after the level premium period expires, most policies become annually renewable.
Therefore, in the same way as described above, premium rates will ultimately become cost-prohibitive and may limit the options available in the future.
Should You “Ladder” Your Term Life Insurance Coverage?
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.
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 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 $2,898 annually.
Using the “laddered” example above, the annual premium would be reduced to approximately $1,883, providing similar protection with an annual savings of $1,015 or approximately 35% less than purchasing coverage with long-term guarantees that might not be needed.
One carrier even 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 provides an annual savings of $60 for each separate policy that would normally be purchased.
Typically, when working with clients, I compare the cost of using two separate policies with the same or different companies to the cost of using one policy with Level Term Rider(s).
Term Life Insurance Underwriting
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 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 employ 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.
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, but would not qualify for it today based on your health, the new policy would also be issued in the best underwriting classification.
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 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 of your disability.
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 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.
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 accrues 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.
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.
Lawrence B. Keller, CFP®, CLU®, ChFC®, RHU®, LUTCF is the founder of Physician Financial Services, a New York- based firm specializing in income protection and wealth accumulation strategies for physicians.
He can be reached at (516) 677-6211 or by email to Lkeller@physicianfinancialservices.com with comments or questions.
- *All life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company.
- **Riders may incur an additional premium. Rider benefits may not be available in all states.
- These are the personal views of the author and may not represent the views and opinions of The Guardian Life Insurance Company of America or its subsidiaries or affiliates thereof.
- Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.
- Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS), 355 Lexington Avenue, 9th Floor, New York, NY 10017-6603, 212-541-8800. Securities products and advisory services are offered through PAS, 1-516-677-6200. Financial Representative, The Guardian Life Insurance Company of America, New York, NY (Guardian). PAS is an indirect wholly owned subsidiary of Guardian. Physician Financial Services is not an affiliate or subsidiary of PAS or Guardian.
- PAS is a member FINRA, SIPC
- 2018-69329 Exp. 10/31/202
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