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Why You Need a Renewable Term Life Policy

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It's an unavoidable fact of life: Life insurance premiums increase with age. And then there's the matter of your health. If you develop certain medical conditions, life insurance suddenly becomes prohibitively expensive, if you can get it at all.

For good reason, then, people seek insurance that can be renewed regardless of any changes in health. That's where a renewable term life insurance policy can be a lifesaver (for your survivors, at least).

The most important aspects of term life
Typically, when you buy a term insurance policy, you lock in a particular rate class that's based on your age, smoking habits, and health at the start of the term. When it comes time to renew a term policy, you can't do much about your age. You'll be older, so your rate will be higher. This much is entirely predictable, and not worth worrying about or maneuvering to beat. That's where renewability comes into play.

Some "renewable" term policies just make it easy to renew, but require a medical exam, leaving you exposed to big problems should health issues surface later. What you want is guaranteed renewability without a medical exam. This is especially true if the policy term won't take you close to retirement age.

Besides that, there are three other key components to consider:

  1. The policy term.
  2. Guaranteed level premiums.
  3. Ability to convert to a cash value policy.

The policy term
Term policies are either annually renewable (one-year term) or cover terms from five to 30 years (e.g., five, 10, 20, 30). Think of annually renewable term as the basic building block on which longer-term policies are built. If you pick a policy term beyond one year, you get two advantages:

  • The total multiyear premium cost is spread out evenly over the policy term, rather than increasing each year, as you get older. For this reason, these policies are usually called "level term" policies.
  • You can often get a better rate for longer terms, since the insurance company gets better odds that you won't switch policies during the term.

As with everything in life, though, there are trade-offs:

  • When you buy a longer-term policy, it may look like you are paying a level premium, but you're really just overpaying in the early years to cover higher costs in later years. Therefore, if you decide to drop the policy before the term is over, you will have overpaid. For a 20-year term policy, for example, you'll have grossly overpaid if you drop it after 10 years.
  • If you have any outstanding questions about your life insurance needs, it's safer to buy a shorter-term policy until you get these questions squared away. It can be tough to accurately estimate how long you will need life insurance, especially if you expect to see a large inheritance, for example, or think you might be able to retire early.
  • As you get older, your income replacement need gets smaller, as there are fewer and fewer years to cover before retirement. Buying shorter-term policies will allow you to reduce the death benefit of your policy accordingly, with each successive term renewal. Reduced death benefits mean reduced premiums.

It's tough to balance all these factors and make a recommendation that fits most individuals. It will always depend on who you are and what you need. In general, though, shorter terms provide more flexibility and the potential for cutting costs at renewal, while longer terms offer a better price for a given level of insurance over a given term, as well as greater predictability in price.

Guaranteed level premiums
Before you purchase a multiyear term policy, be sure that the premium is guaranteed to be level over the entire term. A surprising number of "level term" policies guarantee this for just a portion of the term. After this partial term is over, premiums might increase, although these increases are usually subject to some guaranteed maximum.

Ability to convert to a cash value policy
Getting a "convertible" term policy is generally a good idea. These are priced competitively with similar policies that don't include this provision, so you really have nothing to lose. This feature allows you to convert the policy to an equivalent cash value policy from the same company, without a medical exam, should there be a fundamental change in your health or retirement plans during the policy term.

For more timely advice, see:

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This archived content has been updated by Foolish personal finance expert Dayana Yochim. The Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 23, 2009, at 12:39 PM, RaiddinnRZ wrote:

    Note when you say "convertible to whole life" (which is usually what these are) that you don't just go forward the next day as if its a newly issued policy. Most if not all the time you are going to have to show proof of health now and back then and calculate the difference between what you would have paid all the way up to that point and then you need to pay that up front.

    You could be easily looking at a conversion bill of tens of thousands of dollars. Most companies probably won't let you amortize that bill over future payments either.

    Also, what is the point of loading up a term policy with tons of riders? You wanted to go cheap for a reason. Every rider you add on makes the benefits of term worse and the benefits of whole life more.

    You are going to pay more and more for every rider you throw on there and you gotta remember, this is all for something you are statistically likely to never see a payout on.

    Why not just drop the coverage level until it costs the same to get the whole life policy? It might start you with 20k coverage instead of 200k, but 10 years later for the same cost you will have 30k coverage instead of 180k on the term, 10 more years you will see 50k coverage instead of 150k on the term.

    Eventually the whole life for the same payment will pass the term, and even farther ahead the whole life will still be in force and you cant get term AT ALL.

    Every couple years the insurance company will send you a form you can fill out to up the whole life by 100k or so if you feel like it and have the means for it you can step up then.

    After a while, the whole life can pay itself off as well, so you get free insurance forever past that point.

    If you want to advertise to buy lottery tickets because they have a chance to win a lot and the cost is low, go ahead, but at least tell people that's what you are suggesting.

    Whole life insurance is all about starting small and throughout your life building an asset's value that pays you to own it and becomes worth more and more every day. This is what this website suggests you do with stocks every day. I don't see why it isn't like that with insurance as well.

    Raiddinn

  • Report this Comment On April 23, 2009, at 11:17 PM, APotOfGold wrote:

    The idea of Term Life Insurance is that after your term is done, you don't need life insurance anymore. When I'm 60 and my kids are adults, my life insurance ends and so do my payments.

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