Why is Term Life Insurance So Affordable?
It’s certainly logical to be skeptical of a product or service that is significantly cheaper than a similar product or service. You get what you pay for, right? In most cases, that is correct. If term life insurance is so cheap, then how can it possibly be any good?
To make a legitimate argument regarding any product or service that appears priced well below its competitor, one needs to take a very close look at the product and what it does and does not offer. Let’s take a look at some historical statistics for term insurance and see if we can come to a legitimate conclusion.
First, let’s briefly discuss what the product is. Term Life insurance is a temporary insurance policy that insures for a stated period that in most cases can range from 10 to 30 years. At the end of the policy period, it expires. If the insured is still living at expiration, most carriers will offer some type of renewal, but not all. So then, why is it so cheap?
Just the Facts Mam
o Over 90% of issued term policies are terminated or converted to permanent insurance
o Of the 90% terminated, 45% of them are terminated in the first year
o Of the 90% terminated, 72% of them are terminated in the first three years
o The average life of a term policy is two years
o Less than 10% of issued policies are renewed at expiration
o Only 1% of all term policies issued result in a death claim
Based on the bullets mentioned above, it is easy to conclude that term policies rarely result in a death claim and for that reason, the product is very profitable to the insurance company and therefore priced very low.
If it hardly ever pays, Why buy it?
Because it can. Although term policies rarely result in death claims, doesn’t mean they don’t pay, only they don’t have to pay. Term policies are perfect for mitigating against unexpected death. For example, a 30-year-old head of household typically accumulates a lot of debt while building the family. If this head of household were to die unexpectedly, the surviving family members would be stuck with a ton of debt with no means to pay it. Since term life insurance is so affordable, it is the best way for a younger head of household to purchase an insurance policy with a very large death benefit. Now, the head of household can afford the premium for one or two million dollars of life insurance needed to satisfy the debt created while growing the family unit.
Money Down the Drain?
Many argue that since term policies rarely pay a death claim, it is like throwing money down the proverbial drain. Not so. Most term life policies have a conversion privilege. This means that during the term of the policy, the insured can convert all or some of the death benefit to permanent insurance without having to provide proof of insurability. Yes, the rate will be based on the attained age, but, the insured does not have to be healthy to make the conversion.
A typical family reduces their debt significantly over a 20 year period that translates to a lower required face amount at conversion and, therefore, the new permanent insurance premium is affordable. Yes, much higher, but affordable. Many companies today are offering a return of premium rider that allows the insured to be refunded some or all of the premiums paid if they survive the term of the policy. The insured does pay an additional premium for the rider, but getting a giant refund at the end of 20 or 30 years certainly offsets the additional cost.
In the real world in which we live, purchasing enough permanent life insurance to cover debts, the mortgage, college tuition, and the loss of income is typically unaffordable. Using a term policy that will be priced at about a third of permanent insurance, makes a lot of sense.