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Term Insurance Considerations

A little attention can pay off big time.

If there was ever simple life insurance, term insurance would be it. It’s pretty straightforward: Your client has a death benefit for a specific term of years, and your client pays the premium. If your client dies while the policy is in force, a death benefit is paid.  It’s inexpensive coverage with no moving parts. What else is there to it?

I’m finding more and more clients who are getting tripped up with term insurance, so maybe there’s something policy owners should be paying more attention to. 

Time Flies

No one needs to be reminded that time flies, but not paying attention can be costly.  In recent months, I’ve run into more situations than usual in which a policy owner has blown past the level term period without realizing it.  Monthly auto drafts for premium payments can be quite convenient; however, how many clients remember exactly when a policy was initiated and when the level term period is done?  Despite notices from the insurance carrier, time and time again I see occurrences where the auto draft remains in place when the monthly premium skyrockets after the end of the level term period.

Yes, policy owners should read their mail, and they should review their bank account ledgers regularly, but let’s not kid ourselves.  I’ve seen plenty of situations in which the premium of a few hundred dollars a year jumps to multiple thousands and no one caught it.  Maybe a few simple questions layered into client reviews can save big dollars.

Annual Renewable Term

Another example is with annual renewable term (ART), also known as yearly renewable term.  A major carrier in the market is notorious for selling the product, largely because its level term is so expensive, few would otherwise buy it.  Presenting ART is the only way to make it look even close to competitive, when other insurance companies offer 10-year level, and sometimes even 20-year level premiums, for less than the first-year premium of its product that gets more expensive every year.                 

This is like the proverbial frog in the frying pan.  The premium increases a little annually, rather than a dramatic jump at the end of a level period, so it’s less noticeable.  I find situations in which a policy owner is 10 or 20 years into an increasing premium policy, and the contract is so absurdly expensive that it’s largely a waste of money.  I recall instances in which we could come in and cut the premium the client is paying in half and keep it level for 10 or 20 years when the current premium would have still been increasing annually.

Many times, I’ve heard the argument that the features of its proprietary product are worth the higher premium.  Maybe they are, but if so, sell prospective clients on the benefits of paying more for the level term and don’t trick them into it by lowballing the cost by presenting ART. 

Group Term

Another arena of potentially wasted resources is group term insurance. While working with clients on their insurance and estate planning, I’ll ask about all their life insurance, including insurance through their employer.  While this may be peanuts relative to what we’re focusing on, it’s still worth paying attention to. 

I’ll tell any executive or professional that insurance included as a benefit is always priced right, because they’re not paying for it.  However, they’ve often chosen to purchase more voluntary coverage with the premiums deducted from payroll. Often, participants believe this is very inexpensive coverage, but they’re  generally wrong. With very few exceptions, group insurance is expensive.  It has to be because most of it isn’t underwritten so it’s effectively socialized insurance. All participants pay more so everyone can get it. Even the programs with a preferred or select class requiring underwriting to attain are generally expensive, especially as the participants get older. 

Group programs can be very beneficial for those who have insurability issues. I recall having a discussion with an individual years ago who figured she was contributing to the common good by participating in such a program. I asked her if she claimed her personal exemption, mortgage interest and charitable deductions on her tax return. Of course she did. Wouldn’t not claiming them similarly contribute to the common good by sending more money to the government to spend on others? She quickly changed her mind. It’s simply not my job to pay for other people’s insurance if I don’t have to.

Association Term

Professional association term is basically in the same boat as group term. Many clients tend to think their group of professionals is somehow special and they’re getting a great deal. They’re not. In addition to pricing, contractual language of the program is seldom favorable. The policies often aren’t portable, depend on association membership and have horrible conversion options.

Premium savings aren’t always peanuts either. I was working with an accountant and physician couple who had their term insurance through the American Institute of Certified Public Accountants and the American Medical Association, respectively. They were paying obnoxious premiums. Individual policies on their lives for level term saved them $15,000 in the first year alone, with that savings increasing as their association term kept increasing.

Contractual Language

Finally, it’s important to understand there’s been a very significant change in the market concerning traditional insurance carrier behavior. One exceedingly important aspect of term insurance is the convertibility option.  Some clients dismiss this importance, and it’s not that important … until it is.  Being able to convert to permanent insurance in the future, at the favorable insurance class from when the term policy was issued, despite any current health issues that may preclude favorable underwriting or the ability to procure coverage at all, has saved many clients’ bacon when they really needed it.

A developing issue today is that often the conversion language is written in a way that what policy owners understand to be true isn’t really. The language has a back door the carrier can slip through.  Many carriers have allowed conversion to any of their products by practice, but not by contract. This means that they can change the rules if they want, and many are. 

Numerous times, I’ve been asked to run a conversion quote.  The first step is to see what the carrier rules are today.  Some carriers offer conversion to any product in the portfolio for a given number of years, but not the full level term. Some have limited conversion at any point.  Some have changed from their practice of allowing conversion to any product to their contractual language that isn’t so accommodating.  Often the contract only states there will be a product to convert to, and when we look at that product, it’s a product that was specifically created for conversion and it’s very expensive. The conversion premium for a policy owner with a preferred or preferred best class may be equivalent to a rating of a couple of tables on their competitive products marketed for new business. This can double the premium.

In light of this, I make a point to specifically present term products from reputable carriers with contractual language that benefits policy owners throughout the term of the contract.  I’ll include alternatives, while making very clear what the give and take is.

Other contractual language issues worth noting include the ability to split a policy, reduce the face amount and convert to survivor coverage.

Term is, and always has been, an incredibly useful protection tool for most clients, assisting with  family income, debt coverage, buy-sell funding and protecting insurability. Most clients only need term insurance, and if they have it, pay a little attention to make sure they’re not overpaying and they’re getting what they think they have.  It’s an easy way to save a few bucks and reduce future heartbreak.  I’ve seen advisors cover their entire professional fees through the savings they’ve helped identify. 

Bill Boersma is a CLU, AEP and licensed insurance counselor. More information can be found at or email at [email protected] or call 616-456-1000.  

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