There
are as many flavors and kinds of life
insurance as there are flavors of ice
cream. We concentrate on level
term life insurance because it fits the
definition of what works to address the
risk for which we need life insurance in
the first place. Let's look at the
benefits and structure of level term
life insurance.
First, what does "level" mean when
discussing life insurance and what's the
alternative. In a nutshell, level
means that the life insurance policy has
a fixed premium amount that you pay for
a fixed amount of life coverage during a
fixed period of time. You'll
notice the repeated use of "fixed" in
that sentence. When people new to
comparing life
insurance enter the market,
level term life is usually what comes to
mind. In our view, this is the
most affordable vehicle to address the
common life insurance needs that most
people face. Before we go into
why, what are the alternatives?
First, there are various modifications
of term life that are not level.
For example, there is decreasing term
life insurance. With this
variation, we replace one or more of the
"fixed" with decreasing. For
example, the
amount of term
life insurance premium might
decrease during the length of coverage.
The theory is that you need less
coverage as you get closer to the end of
a given term. For example,
if you have a new family or mortgage,
this assumption is that having the face
value of protection is more important
during the first say 10 years than the
last 10. This might
resonate in the case of a mortgage since
mortgages flip as you go forward from
paying interest to paying equity.
The trade-off for this loss of coverage
in the out-years is a lower premium.
The problem is that it's not enough
savings to justify the loss of coverage
since level term life insurance has
become so in-expensive. Think
about it. The probability of a
person applying for coverage at age 30
and passing away during the next 20
years of their life is very low.
It's a real risk which we discuss in our
life insurance
risk article, but the
probability is low. Is there
really that big of a difference in the
already low probability between age 30
and age 40? Probably not.
Both are equally low and so the premium
savings is slight and in our opinion,
not enough to justify the loss of
coverage.
The
other issue is that you're assuming that
(in the case of the example above), the
financial responsibilities are
significantly less at age 45-50.
Ask a 50 years old if that seems to be
true. If anything, in the case of
a young family, college is usually
hitting around that time and the cost of
college is projected to be 100's of
thousands per child. That's not
exactly the time to skimp on term life
protection for a few dollars of savings.
It defeats the purpose of having life
insurance to begin with.
Of
course, level term life differs
completely from whole life insurance,
where you usually start with a small
guaranteed amount and slowly (very
slowly) build a cash value in the policy
for a lot more premium. We have
explained in our
why term life
article why we prefer level term life as
an affordable way to insure against the
underlying risk. Knowing you are
protected for a guaranteed amount of
coverage and with a guaranteed premium
amount is the right way to do it and
will allow you to sleep better at night.
Level term life insurance accomplishes
all above.
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