Low Cost Term Life Insurance Can Be A Very Expensive Mistake

I'm going to paint with a broad brush and details may vary from company to company and policy to policy, but my points are valid.

The biggest disservice many of these on-line term life insurance companies are committing is the perpetuation of the falsehood that buying term life insurance is all about finding the lowest price or premium. It is not. I'd argue that price should be third on your list of considerations when purchasing term life insurance.

Contrary to the advertisements, life insurance is not a simple or quick purchase. It is, actually, a very complex product and buyers need to understand how it works and how it CAN work. Even a "simple" term policy needs to be analyzed and its features understood.

Although accidents garner everyone's attention and many of us might know of someone who died accidentally, the reality is, most people who die will die from illness or disease. Even with young people, it is illnesses and diseases that cause most young people deaths. And, in America, most who are are terminally ill will have their lives extended by medical science, many times for years, prior to their passing.

Here are the two most important components of a quality term policy.

First, convertibility. Convertibility means you can exchange or convert your term policy for one that last permanently or for your "whole life" regardless of your health and without having to take another insurance exam. It is very important that your term policy come with a convertibility option that can be exercised for the full period of the level term, not just the term policy's early years. And, it must allow you to convert to the insurance company's full suite of permanent products such as all of the whole life, indexed universal life, etc. policies they sell.

Second, the permanent policy options MUST come with an Accelerated Benefit Rider, sometimes called living benefits, that provides for Chronic Illness coverage. A terminal illness or nursing home provision is not good enough. It must be Chronic Illness.

Here's a common scenario that happens every day in America.

You own a policy and you're 8 or 9 years into a 10-year level term policy and you learn you only have a few years to live. If you owned term insurance with the riders I describe, you could convert your term policy to a permanent policy and, once you've declined to a condition where you can no longer take care of yourself, file a chronic illness claim. Depending upon age and other factors which will vary by policy, you could be eligible to receive between 25-75% of the policy's death benefit. To have a qualifying claim, most companies require the insured be unable to perform two of the activities of daily living (ADLs) such as their ability to feed and bathe themselves.

I've personally had clients who have used these benefits and, while it won't prevent the inevitable, it does provide for significant peace of mind and increased comfort as they were able to maintain their financial independence and could afford to stay in their homes during their final years.

Assuming you are working with an independent life agent who understands life insurance and is able to search multiple companies to find the policy that best matches for your needs and circumstances, these are my recommendations of what to consider in order of importance.

1. The term policy must be convertible and convertible to a number of quality permanent life policy options.
2. The permanent options must come with a Chronic Illness rider. The rider should be free and automatically included.
3. The price doesn't need to be the lowest, but it must be competitive. The ultimate price you pay for term insurance will be driven by many factors including your age, sex, tobacco use, health/medical history, occupation and avocations (hobbies). When an agent gives you a "quote", its really not much more than their educated guess. The potential exist for you be quoted one price and, after underwriting, receive a different, much higher price. An experienced and knowledgeable agent knows how to provide you accurate and reasonable pricing expectations for you to make decisions with.

Note this article does not address the amount of insurance one should have. I'll address this subject another time but, for now, I'll simply say, "get a million". Term life insurance is inexpensive and having a one million dollar policy versus $250,000 or $500,000 might only be a difference of a few dollars a month. If you're married with young children, get a million!

Lastly, I want to share something a little ironic. On more than a few occasions, I have found that a quality term policy may be no more expensive or difficult to qualify for than one of the low quality products. It is not often that one can buy a higher quality product and pay the same or less than a lower quality product but, with term life insurance, it can happen.