The Right Term Policy for You

The Right Term Policy for You

You can renew every year or you can lock in for two decades

When in doubt about which life insurance policy is best for you, opt for a no-frills term life policy that covers you for the life of the policy and pays only upon death. It gives you most coverage at the cheapest price for short-term needs, and can protect you anywhere from 1 to 20 years. You can take out a term policy to span the years when you’re worried about your home mortgage, college costs, car payments, or other pressing monthly commitments. When that’s behind you, you can downsize to a policy with lower premiums and benefits to complement Social Security and pension payments.

What your options are

If you’re not sure what your insurance needs will be a few years from now, annual renewable term lets you reconsider your coverage each year. Term policies are renewable each year, or can be locked in for 5, 10, or even 20 years. The catch is, your premium rate will rise each year as you get older.

The initial rate may be low, but it can more than double by the tenth year.

You also can opt for a product called guaranteed level-premium term., which locks in a flat premium for up to 20 years. The benefit of a long-term policy commitment is that your premiums stay flat for at least five years and you don’t face a medical exam until the term of the entire policy expires.

The right time to get insurance. Photo by Elena

There are other term options, as well. Term insurance offers protection up until you are 65. At the end of the term, the coverage stops, but it can be picked up for another term if you have a renewable policy. Renewable policies are easy to extend, but your premiums will be higher because you are older. Or you might choose convertible term life, which allows you to trade in your old term policy for a whole life policy – which includes a savings component and a death benefit – without a medical examination. Whole life policies command higher premiums, but those premiums won’t ever change.

What the experts say

In the short run, annual renewable term is cheaper, but level-premium term, usually wins out over five years or longer. A 40-year-old man who needs $200,000 of coverage, for example, can purchase an annual renewable term policy from USAA Life with a first-year premium of only $282 per year. By year 15, the annual premium would reach $860. The projected cost over 15 years: $8,102. (Of course, the actual cost might be higher, since rates could rise.) A 15-year term policy from First Colony Life Insurance Co., a major seller of level-premium term, has a guaranteed premium of $368, annually for a total of $5,520 over 15 years. That’s savings of $2,582.

A warning: New insurance regulations are in the works that, if enacted, might cause insurers to guarantee rates only for the first five years.

Unbearable Rates

These rates may not be the lowest you can get for a term life policy, but they represent a good value. The rates are first year premiums for a $100,000 annual renewable term insurance policy from USAA Life, which sells life insurance products by phone. A preferred risk usually is a healthy nonsmoker.