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Term Life Insurance, Perm, Universal Or Just Give Me An Advil
Just Give It To Me In Plain English
When I started in the business in 1974, I learned a whole new way of speaking. It's called "insurance gibberish." I'm not sure who invented the language, but in my opinion, it is responsible for more lost sales by agents than anything else. I would give presentations using fancy insurance terms; and assuming the person was still awake, they were so confused at the end, they could not make a decision.
I say this because I feel our industry has done a poor job in communicating our products, thus so many people are underinsured or not insured at all. Hopefully, this site will clear some of the fog.
Let's start with the products. What I'm about to say next is probably not legally correct, so don't sue me. Life insurance products fall into two basic categories.
First there is "permanent" or "cash value" life insurance.
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In this arena there is "whole life," "paid-up life," "straight life," "cash value life insurance," "limited pay life," "flexible adjustable premium life," "universal life," (and it's ugly step-sisters "variable life" and "variable universal life" - the next link on our site tells why most people should think long and hard before buying a universal or variable life type of policy - it's titled "Universal Life, The Good, The Bad, And The Ugly"), "endowment life" "your child's college life insurance plan" and so on ad nausea. They are all variations of the same thing, lifetime coverage with some savings element attached.
The following a very bad example, but hopefully it will drive the point home. In theory, "Permanent" products are designed to last until your death, period. Along the way, they are designed to build up a "cash value savings account" or equity in the policy.
Now here's my bad example. If you purchase a house and get a mortgage, with every payment you build up equity. At some point, your mortgage will be paid up and you will own the home free and clear. This is a stretch, but "Permanent" life insurance policies are similar in concept and I just want you to get the concept. With every payment, they are designed to build equity (savings) and at some point they are paid up like a mortgage. "Permanent" contracts are designed to insure you for life. If you die along the way, the policy pays. These "permanent" contract types cost a lot more than the second product type, "Term".
"Term" products also have several names. Some of the product names are "annual renewable term or 1-year term," "5-year term," 10-year term," "15-year term," "20-year term" 30-year term," "decreasing term," " mortgage insurance." Also available are "term-like," policies where you can buy a "Term" policy for lifetime coverage with no savings element.
Let's go back to the bad example above of buying the house. In that situation, you own the house. In contrast, "Term" policies are like renting that same house. You and the landlord agree on a 5-year lease at a set price. After the 5 years is over, you move out or renegotiate the lease. With "Term" life insurance it's the same process.
You and the landlord (the insurance company) agree on terms for a level 5-year premium (lease) at a set price. After the 5 years, the premium will likely change (count on it to go way up). There are three choices - 1) accept the renewal rate - 2) cancel the contract - 3) apply for new policy. If you choose to apply for a new policy, they will underwrite you based on your current health. This can be good or bad depending on what shape you're in. Although I will cover this in another area of the site (it's titled "Guaranteed Renewable - Give Me A Break"), be aware after once the premium guarantee period is over, be sure you are sitting down when opening the renewable premium envelope.
So "Term" policies have one thing in common - they are bought for a fixed "term" period.
Return of Premium
Also in the term camp is a relatively new product called "Return of Premium Term." This is another attempt by the insurance companies to get you to part with more of your money. The concept is simple. At the end of the term period, you get all your premiums back. Sound good? It is if you live out the full term. The only catch is the cost. Let's say you are a female, age 45 in excellent health, seeking $250,000 of coverage for 20 years. The premium is $272.50 per year. A 20-year "return of Premium" contract will cost $627.50 per year. So if you outlive the 20-year policy, you get back $627.50 times 20 years and have beaten the system, or have you? You have spent $355 extra per year, or $7,100 to get the policy. In addition, if you die before the end of the 20 years, the company pays a death claim, nothing more.
What to Buy?
The bottom line is: if you want a lot of coverage at a reasonable price, knowing that some day the policy will go away, buy "term." Families with kids have high insurance needs to cover survivor expenses and future education costs, should consider "Term."
We're getting more and more calls from those over 60 years old seeking more insurance. If their survivor retirement funds are looking dim and their needs are more long-term, we may recommend "Permanent" lifetime coverage.
Questions? Comments? Suggestions? 1-800-542-5530