Last Updated: March 12, 2012
Term insurance is a relatively straight forward form of life insurance. An individual or business pays a specified premium to an insurance carrier, and the insurance carrier agrees to pay a specified death benefit to the stated beneficiary as long as the policy is in force when the insured dies. The concept is simple, but all term insurance is not created equal. This checklist will help you evaluate your existing term insurance and term insurance you may purchase in the future.
Know Your Carrier
Reviewing a carrier’s financial metrics is an important part of a policy evaluation. Ask these important questions.
- What are the insurance carrier’s financial ratings?
- How do those ratings compare to other carriers?
- What is average policy size for the carrier and how does that compare to your current policy or a policy you may purchase?
Learning about the carrier’s customer service philosophy is also important. Ask your friends and neighbors about experiences they may have had with a particular insurance carrier. Also consider asking the following questions.
- Will the carrier alert your insurance adviser when you move, change the beneficiary, or when your premium is past due?
- Will the carrier allow you to reduce the amount of insurance in the future or are you “locked in” to the amount of coverage purchased?
- Are you purchasing coverage from a mutual carrier, which is a carrier owned by its policyholders, or a stock company owned by shareholders?
Your insurance adviser should be able to provide you with answers to all of these questions.
Know Your Product
Many people buy term life insurance to cover specific need such as paying off a mortgage or establishing a college fund at the death of a spouse or parent. Oftentimes however people need insurance for a longer period of time than was anticipated when the term was purchased. If your term policy has run its course and you remain in good health, perhaps you can purchase additional term insurance albeit at a more expensive rate. But what about those whose medical history has changed since they purchased their term insurance?
Having a term policy that is convertible to a permanent form of insurance without medical underwriting is an important feature. Having such a policy provides an uninsurable person the opportunity to keep their coverage in place. There are a few important questions to ask when evaluating term conversion options.
- What products are available should you decided to convert your term insurance?
- When does the option to convert term to permanent insurance cease?
- Is conversion available until a particular age?
- Is conversion available for a certain number of years?
- Does the carrier provide a conversion credit, a concept whereby part of the term life premium is credited towards the policy to which the term would be converted?
Another major factor for consideration is the waiver of premium provision. When this rider is added to a policy, the insurance carrier will pay the premium on your behalf if you are totally disabled. It is important to know the cost of the rider as this varies greatly from carrier to carrier. Also be sure you understand the definition of disability as this too varies from carrier to carrier.
Know Your Pricing
Price is a major factor for consideration when purchasing term insurance. The fewer the number of premium payments in a given year, the less expensive the coverage. Identify the surcharge for paying premiums semi-annually, quarterly, and monthly as compared to an annual payment. Confirm if the premium estimate you are reviewing is reflective of the frequency for which you intend to pay premiums.
Term life insurance pricing is not always linear. Insurance companies have price bands, or break points, for different quantities of coverage. For example, the cost per $1,000 of coverage for a policy between $100,000 and $500,000 may be $10 while the cost per $1,000 for a policy above $500,000 may be $9. If the amount of insurance you may purchase is near a break point, consider purchasing more coverage to get the lower price per $1,000.
Finally, ask you adviser to research carriers that favorably underwrite policies for your medical ailments, avocations, and tobacco use. Many carriers have niches. Some will offer favorable pricing to those who have families with significant medical histories and others will not. Some carriers offer very good pricing to SCUBA divers and others will offer coverage to cigar smokers at nontobacco rates.
While the concept of term insurance is very straight forward, selecting the right carrier and product may not be as easy as you may think. Work with a knowledgeable adviser who can provide guidance relative your particular situation.
