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Level Term Life Insurance
It seems these days that as a life insurance agent you cannot be on the fence when it comes to the discussion of term vs. whole life. There are basically two camps.
Camp one: “Term life is better!”
Camp two: “Cash value whole life is better!”
Most agents and financial planners, including Suze Orman and Dave Ramsey, have declared war on whole life insurance. It all seems so black and white. But is it really?
There are many life insurance websites that espouse the benefits of term life insurance vs. whole life insurance. However, it is important to not get lost in the back and forth and remember that each has a unique place in the life insurance landscape. Although we agree that term life is usually the best choice, there are certainly times when whole life is better than term life.
Level Term Life Insurance Defined
Level Term Life Insurance DEFINITION: it is a valuable, cost efficient tool that enables the user to insure his or her life in order to provide financial protection for his or her beneficiaries for a guaranteed set period of time, offering a guaranteed death benefit and level premium payment during the term.
This is in contrast with decreasing term life insurance where the death benefit face amount goes down over the life of the term, while the premium remains level.
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About Level Term Life Insurance
Life insurance sales in the U.S. began way back in the 1760s. Source. Overtime, the art of insuring a human life has become finely tuned. So much so that term life insurance premiums are at close to all-time lows in the United States. The low premiums are due in large part to the advances in actuarial science.
Term life insurance actuaries use life expectancy charts and mortality table estimates (and a few extra proprietary ingredients) to determine term life insurance rates.
You can view the government’s life expectancy chart to get an idea of what your life expectancy is.
Depending on your health, your life expectancy, your hobbies, occupation, etc. will determine your life insurance health classification. Your health classification is then used in conjunction with your age to determine your premium. Everyone in the same health class and the same age and gender as you will pay the same premium payment for the specific face amount and term length.
Term lengths vary from 1 year annual renewable term life insurance up to 30 year level term life insurance policies, with 35 year level term return of premium life insurance also available.
The most popular term length is 20 year term insurance due to its low price and reasonable long period of protection.
Multiple of Income
The amount of coverage someone can qualify for is typically based on a multiple of income. The applicants income is multiplied by a factor based on age.
Although it varies slightly from one carrier to the next, for applicants under 40, the multiple of income typically available is 25 times.
For ages 41-50 the multiple of income drops to 20. Ages 51-55 have a multiple of income of 15. Ages 56-65 have a multiple of income of 10. For ages 66-70 the multiple of income drops to 5. And for ages 71+, each applicant is considered on a case by case basis.
For a non working spouse, carriers will usually allow the non working spouse to get as much coverage as the working spouse, up to a million dollar life insurance policy.
Now that you have a basic understanding of what term life insurance is, let’s move on to what term life insurance is not.
One caveat at the outset. We love term life insurance. In fact, we sell more no exam term life insurance than any other product.
But having said that, we also know that permanent life insurance has its place.
We need to point at the outset that life insurance is meant to replace, not create, value. The idea behind term life insurance is that it provides income replacement for lost wages. It might be better coined "death insurance" since it covers you if you die, not necessarily if you live.
Multiple of Income
Term life insurance provides those you love with the money you would have were you still alive. That is why a good rule of thumb in determining how much term life insurance coverage to get is to multiply your income by ten. That way, when you die, your family gets 10 years of income replacement.
If you are looking to invest your money, life insurance is typically not the best option. That is why many financial planners recommend buying term life and investing the difference between the cost of term and whole life. Financial gurus Suze Orman and Dave Ramsey are two of the most outspoken advocates for this approach.
Although it is not an investment, term life is an excellent way to leverage your wealth. Due to the relatively low premiums of term, a small monthly payment can create a huge financial benefit to those you love. And the younger you are, the lower your monthly premium will be.
Term builds no cash value. One of the primary benefits of cash value life insurance or universal life insurance is cash value accumulation. The reason people want cash value is so they can withdraw proceeds from the policy down the road for various reasons, including in an emergency, to start a business, to fund an adventure, supplement retirement, etc.
However, since term builds no cash value, the policy contains no cash value to withdraw from. Just know that cash value comes with a price. Term life is much more affordable (5-10 times less) than whole life. Cash value has its place but it is not necessary for everyone.
Consider Term with Return of Premium (ROP)
Return of premium term life insurance allows the owner of the policy to recoup all premiums paid upon the end of the term. Among the different companies we represent, Assurity, AIG, Mutual of Omaha and Voya offer term with ROP riders.
The pros of term life with a ROP rider are:
- All premiums returned upon end of term
The cons of term life with a ROP rider are:
- higher premiums
Term life is an affordable way to protect you family should something terrible happen. It is an excellent option for providing protection for your loved one, business, or simply to pay off debt should you die. However, the policy only lasts for the term length, typically 10-30 years. Once it expires, you can keep it but the premiums will increase annually with most companies.
If your goal is to use life insurance for estate planning, permanent coverage is probably the best route.
The main reason someone would use life insurance as part of an estate plan would be to avoid taxes or to supplement the taxable portion of a large estate.
If your goal is estate preservation, term life will not provide the long term coverage that is needed.
When considering an exit strategy for your business, one potential option is to fund a buy sell agreement with life insurance. Since you desire the coverage to provide for your business succession plan no matter when you die, choosing permanent life insurance makes the most sense.
However, rather than choose permanent coverage from the start, another alternative might be worth considering.
An alternative strategy would be to choose term life while the business is growing and liquid assets are scarce. Since term life offers a conversion option, you can always convert the policy to permanent life coverage down the road when money is not as tight.
The big advantage with this option is you free up cash in the early stages of the business, while at the same time providing security for your business, family, or both.
Also, consider term life insurance to secure a small business loan or for key man insurance.
It should be valued as a potential lifesaving product, providing income replacement for your children and spouse.
It is amazing to talk to people who have no life insurance but have cable television. Where exactly are your priorities?
If you value entertainment more than securing your family’s financial future, you might need to re-evaluate your priorities!
For anyone with a family, term life is an inexpensive way to provide security. Further, even those who do not have a spouse and children, having some coverage in place to provide financial support for your loved ones should you die prematurely is simply a prudent and loving act.