Term insurance makes comeback
``Buy term and invest the rest.'' That seemingly vague phrase had a lot of meaning several years ago. Financial planners, money managers, anyone except life insurance salesmen, used that phrase when telling people not to buy whole life, but to buy cheaper term insurance and invest what they saved on premiums - the rest - elsewhere.Skip to next paragraph
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The phrase worked very well into the early 1980s, as term insurance accounted for some 60 percent of the face value of all insurance sold in the United States.
But by 1986, that share had dropped to 37 percent, after the insurance industry fought back with variable life and universal life policies, which combined some of the features of whole life and term insurance.
Now, however, term insurance seems to be making a comeback. Lower interest rates than before on the investment portions of variable and universal life have made them less attractive and, while term insurance was out of favor, insurance companies made some changes in these policies to give customers more options and flexibility.
Some of these changes were discussed in two recent - and useful - publications. Financial Planning magazine used to be available only to financial planners and other professionals in related fields. Now, anyone can subscribe by sending $48 to Financial Planning, Drawer CS 198134, Atlanta, GA 30384. While it is still aimed chiefly at planning professionals, the magazine's discussion of financial products, trends, and issues will be easily understood by most laymen.
The other publication is a book from Consumers Union, publisher of Consumers Report magazine. ``Life Insurance: How to Buy the Right Policy from the Right Company at the Right Price'' (Consumer Reports Books, New York, $12) is a well-researched guide to understanding and comparing different types of policies from all kinds of companies.
As both the May issue of Financial Planning and ``Life Insurance'' explain, the basic idea behind term insurance is just that: pure insurance for a specific term, nothing more. No investment portion, no cash buildup, just fairly large amounts of insurance for fairly small premiums.
But even here, careful shopping is needed. Depending on what company was used, for instance, a 35-year-old woman could pay from $200 to $400 a year for $200,000 of term insurance. (Both prices, of course, are still considerably less than the $2,000 she might pay for the same coverage from a whole life policy.)
But with the new varieties of term insurance available, there's more to shop for now than price.
Traditional term policies can run from one year to as long as 10 or 15 years, though 1- to 5-year terms are most common. At the end of the term, most policies are automatically renewed without a medical examination, but people who are willing to go through another exam (usually a fairly simple procedure) can save money at renewal time.
Figuring that a customer who has had a recent checkup is a better risk than someone who had an exam five years ago, many companies charge lower premiums for new customers than they do for renewing customers. So it might be worthwhile to compare the costs of buying a new policy with staying with your present company.
While the premiums on most term policies stay the same for the length of the term being covered, there is a variation on this that has become popular fairly quickly. It's called ``adjustable-rate term'' and, as its name implies, the premium rate on the policy adjusts upward over the term to cover the higher costs of the level death benefit. The beginning premiums on these policies can be very low, making adequate coverage more affordable for many families.
Other term policies have premiums that stabilize at some time in the future; others start higher in the first year, drop in the second year, then begin climbing again.
Some policies combine features of term insurance and universal life. Allstate Life, for example, has a computer-aided program that will figure out how how much coverage you need to cover a declining mortgage debt, say, for the next 27 years.
One important thing to consider when selecting a term insurance policy is convertibility. This is the ability to change, or convert, your term policy to cash-value insurance, such as universal life or whole life. Since many term policies aren't renewable after age 65, people who want to maintain coverage will need convertibility. They may want insurance for estate tax reasons, or there might still be young dependents who will need the protection after the insured person retires.
When signing up for term coverage, then, ask when the conversion to a permanent policy is allowed: for the life of the policy, only during the first few years, or never. If conversion is allowed, can you switch to any one of the company's interest-sensitive policies, or must you take the least advantageous whole life?
Give yourself plenty of time to comparison-shop for the best policy. Compare current rates with estimated future premiums, well into the future, if possible.
If you need insurance quickly, try to find the best coverage you can in a hurry, but sign up for a one-year policy. Then you can take the time to do some reading and comparing before buying longer-term coverage.