Questions I’m Asked

Dennis Ho

TERM LIFE INSURANCE is popular not only because it’s a relatively cheap way to protect your family, but also it’s simple: You pay a premium for a chosen “coverage period” and, if you die during that time, your beneficiaries receive the policy’s death benefit.

Yet, despite its reputation for simplicity, term insurance comes with a surprising number of options. On top of that, there are now dozens of insurers offering the product. Yes, if you buy the cheapest 20-year term policy you can find from an insurer that’s rated A or better by AM Best, you’ll likely do just fine. Still, a bit of work upfront could help you get even more value out of your coverage. Want the right term policy for your family? Here are answers to the top four questions I get asked:

1. What’s a term conversion benefit? This allows you to convert your term insurance into a permanent, cash-value policy, such as whole life or universal life. The rates will be based on your age at the time of conversion, but you’re locked in at the health class you were approved for when you purchased the term policy, regardless of your actual health at the time of conversion.

This can come in handy if you need to keep coverage longer than you initially assumed, but your health has deteriorated so you’re unable to purchase a new term policy at a reasonable rate. Unfortunately, this happens much more frequently than most people expect, so a strong conversion benefit does have value.

The good news is, term policies from most top insurers come with free conversion options. But the benefits can vary a lot. For example, on a 20-year term policy, one insurer may require you to convert within the first 10 years, while another insurer might give you the whole 20-year term period to decide. Similarly, one insurer may allow you to choose from all the permanent policies it has available at the time of conversion, while another insurer might require you to select from a limited set of policies with potentially worse pricing.

The bottom line: When selecting a term policy, don’t just look for the lowest price. For the top two or three quotes you receive, get details on the conversion options. You might get a much stronger conversion option for just a few dollars more per month—well worth it in my opinion.

2. Should I ladder policies? In other words, should you buy multiple policies with different maturity dates?

Because most people assume their insurance needs will decrease over time, I often get asked if it’s worth splitting their purchase up into multiple policies of varying lengths. For example, if folks need $1 million of coverage today but expect their need to drop to $600,000 in 10 years, they might purchase a $400,000 10-year policy and a $600,000 20-year policy. Their total coverage starts at $1 million but would drop to $600,000 after year 10, when the $400,000 policy matures.

That brings me to a fact that many people are unaware of: Even if you purchase a 20- or 30-year term policy, most insurers will allow you to reduce your coverage prior to maturity—and your premium will be reduced proportionally. Take the example above. Even if you purchased a $1 million 20-year term policy, you could call the insurer in year 10 and request that the company reduce your coverage to $600,000. Your premium would then be adjusted accordingly.

The upshot: A laddering strategy may not save you as much money as you expect. On top of that, if you pursue a laddering strategy, you’re committing to a lower coverage amount in the future, which could leave you in a tough spot if your needs change but you’re unable to purchase a new policy.

I generally find that, if you’re under age 45 and in good health, a ladder saves very little, if any, money. In this situation, I’d much rather pay a few dollars more per month and have the flexibility to keep my coverage in place longer, if needed. On the other hand, if you’re facing higher premiums due to health issues or because you’re older, and you’re confident about your future coverage needs, a ladder could save you much more and it’s worth investigating.

3. Does term insurance still make sense in my 60s or should I go with a cash-value policy? If you need life insurance in your 60s, you might be tempted to consider permanent insurance. But the principle that applies in your 30s still applies in your 60s: You should only purchase permanent insurance if you need coverage for life.

Because people are living longer than ever, a 20-year term policy in your 60s is still much cheaper than lifetime coverage. For example, a healthy 65-year-old man could purchase $2 million of 20-year term coverage for about $700 per month, while a guaranteed universal life policy with lifetime coverage is about $1,700 per month.  Again, if your situation requires lifetime coverage, paying the higher premium for permanent insurance makes sense. But if your need is temporary, the 20-year term policy is generally a much better value.

4. How can some insurers offer “instant” term insurance online—and when does it make sense to buy it? You may have noticed websites offering “instant decision” term life insurance. It’s a tempting proposition: You fill out an online form and, like magic, you get approved instantly, with no medical exam required.

In most cases, I’ve found these offers to be bad value for consumers, because the convenience comes at a cost: Pricing is often 25% to 50% higher than coverage purchased the traditional way. For example, a 40-year-old woman in good health can get $1 million of 20-year term for $42 per month via the traditional route, but the cost on a popular instant coverage site was $56 per month. That’s a 33% difference, equal to $3,360 over 20 years.

Because the “instant offer” sites have less information about you, they need to be more conservative in their pricing, which means higher premiums. It doesn’t hurt to explore these sites to get a feel for pricing. But unless you absolutely need to have insurance in the next 30 minutes, you’ll likely be better off going the traditional route. Many traditional insurers have improved their underwriting processes, so healthy individuals can be approved in as little as a few days, with no medical exam. True, the traditional process is still nowhere near “instant.” But it’s worth being a little bit patient—because it could save you a few thousand dollars.

Dennis Ho is a life actuary and chief executive of Saturday Insurance, a digital insurance advisor that helps people shop for life, disability and long-term-care insurance, as well as income annuities. Prior to co-founding Saturday, Dennis spent 20 years in the insurance industry in a variety of actuarial, finance and business roles. His previous articles include Retire That PolicyCare to Choose and Don’t Ignore It. Dennis can be reached via LinkedIn or at Follow him on Twitter @DennisHoFSA.

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