Term life Insurance: why paying less doesn’t always pay out

By: Burke A. Christensen, JD, CLU, EKU insurance and risk management professor

When you go shopping for anything, you usually want to get the most value at the least cost. It is in a consumer’s best interest to know why that idea doesn’t always apply when shopping for life insurance.

If all you want is life insurance coverage for a fixed number of years (20, for example) and you are certain that you will either die before the term ends or that you will outlive the policy and still be insurable in 20 years, then buying the cheapest term you can find may work out well for you.

However, if you are one of the millions of Americans who can’t bank on one of the two scenarios above, that’s when the terms of your policy become important and not all term policies offer the same benefits. 

The cheaper the policy, the less likely it is to include favorable provisions you could need in the future. These provisions include:

Right to Renew

You want to be sure that your term policy is renewable.  This means that you get to choose whether to add more years on to the length of time you are covered.  But you also want to know what the premium will be when you renew.  A right to renew at a premium you won’t be able to afford, isn’t worth much.

Right to Convert

You want to know if your term policy is convertible.  This means that you have the right to change your term policy into a whole life policy.  More than 90% of all term insurance dies before the insured does.  If you’ve bought insurance that isn’t likely to be there when you die, you might reconsider what you have bought. You also want to know what products are available to you if you choose to convert.  If you choose to convert but the policy options are not good ones, you may wish that you had bought a different term policy to begin with.

Disability Waiver

A disability waiver of premium provision is also important.  This means that if you become disabled (as defined in the policy) then the insurer will pay the premiums for you while you are disabled.  This can be very important if your disability prevents you from going to work and you can’t afford to pay the premiums.  For this provision to benefit you, you must know how the insurer defines disability.  You might not be able to work, but if your disability doesn’t meet the insurer’s disability requirements, you won’t get the benefit of the waiver.

These provisions work together to provide you with the best coverage.  For example, you buy a term policy from a quality carrier with these provisions in place. Later, you become disabled and now want to have a policy that will be certain to be there when you die.  So, you convert the term policy to a whole life policy and exercise the disability waiver of premium.  You now have a policy that won’t die before you do and you won’t have to pay the premiums so long as you are disabled.

Published on May 23, 2018