Jul 21, 2009
Cheap Term Life Insurance - Is it Worth It?
Cheap term life insurance is searched over 14,000 times a month, almost as much as “best term life insurance” and “affordable term life insurance.” The question you must ask yourself when you decide to get term life insurance is “is cheap term life insurance going to be enough for those I leave behind?” There is little doubt that you can greatly reduce your term life insurance to make it cheap, but you may be risking your value to the beneficiary.
What you must also realize is that if you go the cheapest route possible, you pay more of a premium at the end of the term. By doing this, you will end up paying more in the long run if you do decide to keep the cheap term life insurance policy. It is almost similar to getting an adjustable rate mortgage in that you will see more payments on the back end of the policy rather than on the front end.
Overall it is wise to do your research and determine if term life insurance is right for you. There is risk with any insurance policy but you may be able to save some money if you educate yourself before you sign on the dotted line.
Unless they have an increasing term policy, the price will be the same throughout the term. With an increasing term policy, their death benefit goes up with their premium, so it is definitely not like an ARM because you are getting an added value for that increasing premium.
In reality, the biggest concern about buying cheap term insurance is whether or not the insurer is pricing it in such a way that they can actually pay claims.
Both of you are kind of right. There are a great many factors that determine the monthly premium for a term life insurance policy. Some companies have better rates for smokers some understand diabetics than others…etc. All term policies should be level term that insures the rate will not increase. All of this points to the fact that smart consumers should use a broker that has multiple companies so they can shop for the best rate for their particular needs.
Mike
A couple of points. The notion that all term policies should be level term is nice, but does not match the market. AARP, for example, markets NY Life’s term insurance with level premiums in 5-year bands, i.e. every 5 years the premium is adjusted up. So you don’t want to assume the premiums remain the same; you want that in the contract.
Another thing to keep in mind is that some companies are marketing cheap life insurance (both term and whole) then hiding the fact that it’s really accidental death insurance, i.e. it pays only in the event that the insured dies by an accident. Of course this lowers the odds of a covered death, so the rates can be way lower.
And if you catch a company marketing AD insurance as “life” (e.g. Globe does this), take care to read the fine print. Most AD policies (or riders) pay if the insured dies within X days of the accident. A common value for X is 90 days, but an insurer can set X equal to, say 30 days, or even less, and thus generate an even lower premium payment.
To illustrate the principle, consider this. According to http://www.livescience.com, the odds of dying in an accident in your lifetime are 1 in 36. Say a lifetime is 80 years, then the odds of dying in an accident over a 20 year term would be (roughly) 1/36 * 1/4 = 1 in 144. So an insurer offers you a 250,000 policy that has a probability of paying off of 1 in 144, or an expected payoff of 250,000/144 = 1736.11. Over a nominal 10 years (assume a normal distribution across the term period), that’s 14.47 a month, but of course the insurer is earning interest on the premiums paid. So “$250,000 of life insurance for $15 a month,” should make good money for the company.
The 1-in-144 odds can be further reduced when the company adds conditions to the accident. e.g. “$1M life insurance for $1 a month” (if you die from being hit by an asteroid) will make an insurer lots of money.
So, the lesson is: caveat emptor!