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What Kind of Term Life Insurance Should I Buy?

Let me begin with some numbers to help set the stage for the point I want to make in this post. If a 38-year-old male, in good health, wanted to purchase $500,000 of level term life insurance, here are some average premiums he would pay:

  • 10-year level term annual premium = $179.  
  • 20-year level term annual premium = $304.
  • 30-year level term annual premium = $549.  

If you were to purchase and maintain this 30-year level term life policy to maturity, or age 68, you will have paid $16,470.   What could have happened in those 30 years that would reflect negatively on this decision?

  1. You could have died.  By purchasing the 10-year level term instead, you could save $370 each year until death.  In the case of death, it would be cheaper to buy the 10-year level term life.
  1. You could have an employer pay for this life insurance benefit, thus no need to keep this policy.  CAUTION:  If you left this employment you may not be able to take the life insurance with you.  If you are still healthy, then you could purchase more insurance.
  1. You could have taken on more debt, and need to increase the $500,000 of death benefit.  This might cause you to cancel the original policy and purchase a new one.
  1. Your health could have changed for the worse and you can never buy anymore life insurance.  This will require you to keep this 30-year term life and hope you die before 30 years is up.
  1. You have enough money that you don’t need this policy. You may have invested your savings well, made a lot of money, so you no longer need this 30-year term life insurance and you cancel.
  1. The trend of people living longer may continue, so premiums for new policies will be much less than what you are paying.  Wisdom dictates you purchase a new policy and cancel this 30-year level term life.

Now that you see the big picture, what are the odds this 30-year term life will stay in place as it was sold to you for the full 30 years?  In my experience 5 percent will keep this 30-year level termHourGlass policy for the entire time.  With a 95 percent chance of ending the original 30-year term policy, for any of the reasons I have listed above, it makes a lot more sense to purchase a 10-year term policy and just keep buying a new policy every three years.  This way you will always have the lowest premium, and when rates go down, you can take advantage of those, too.
So why do insurance agents sell 30 years?  Insurance agents select this 30-year level term because they assume you will need at least $500,000 death benefit, for sure, and for a long time!  You many have young children, owe money on a 30-year mortgage, or have student loans, or own a business that can not be sold for liquid cash.
I don’t disagree with any of this reasoning, However, what is the  likelihood that during your lifetime some of the following will happen to you?

  • Death before age 68.
  • Changing employment.
  • Getting into a bigger mortgage.
  • Not being able to save extra money.
  • Having your investments fail miserably.
  • Your health changes so you cannot buy more life insurance.
  • You live to the ripe old age of 88+.

SUGGESTION:  Purchase a 10-year level term life and be flexible.  Always use a strong A+ rated insurance company, so if your health changes, you can convert the term life to permanent and keep the $500,000 until death.  
For more information and help on term life insurance contact me, (801) 292-1099, ext. 2.

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