Life insurers have been making money on term life insurance for years. Inside industry statistics peg term life payouts at less than 1 percent annually.
That means that less than 1 percent of all term life insurance policies ever pay death benefit claims.
It’s not that insurers are scamming people or refusing to pay, it’s that most people outlive their term policies.
Term Life Has Gotten Cheaper
Term life insurance is inherently a low-premium product. A minimal amount of money needs to go toward funding the death benefit because a significant portion of the premium calculation resides in the payout ratio or probability.
Sure, insurers need to account for the usual mortality costs and risks, but the truth is that most people outlive their term policies. That’s a huge reason why insurers can afford to offer low premiums.
Another factor contributing to low premiums is the fact that the insurer doesn’t need to provide a cash value for the policy. With products like whole life insurance, the insurer must set aside a significant portion of the premium as a reserve to pay for the future death benefit, and that death benefit will be paid if the insured continues to pay premiums until he or she dies.
A third reason why term life has gotten cheaper is that people are living longer. This means that the policies that insurers are issuing today are being targeted at a population with a lower probability of death within the “sweet spot” of the term insurance market – ages 30 to 45.
The New CSO Mortality Tables
When the insurance industry moved from the 1980 CSO mortality tables to the 2001 tables, policies got cheaper, and insurers could lower premiums. While some insurance companies took this opportunity to raise profits, others saw this as a competitive opportunity.
CSO mortality tables are how insurance companies class risk – in other words, it’s how they determine what to charge you based on your risk of death at any given age. When actuaries completed the 2001 model, they found that, in some instances, males outlived females – reversing a long-standing trend showing females outliving males. This was particularly true in the 20-30 age bracket. Smoking had a greater impact on mortality, meaning insurers may have chosen to raise premiums on smokers.
However, mortality tables were extended out to age 120, instead of 100, meaning that term policies could be positively affected. This means, in plain English, that you get to pay less for term insurance because people are generally living longer lives.
Level Premium Funding
Level premium funding also helps lower the cost of term life insurance. With the most basic type of term insurance, annual renewable term life, you pay premiums for one year, and the insurer only charges you one year’s worth of death benefit coverage. On your policy anniversary, the insurer recalculates your risk of death and increases your premium to reflect your older age.
With level premium funding, the insurer collects premiums in excess of the one year cost of insurance and then guarantees death benefit coverage for:
- 10 years
- 15 years
- 20 years
- 25 years
- Even 30 years as long as you continue paying premiums for the entire length of the term.
It invests the excess premium and uses investment interest and the excess premium to hold down the rising cost of insurance. As insurers have gotten better at investing and diversifying out of government debt, they’ve also been able to lower premiums of term policies.
It often is recommended that consumers consider a level-term policy for 10 years or more. However, if your life insurance needs are shorter, a short term life insurance policy may be the option that makes the most sense for your family.
How Much Term Life Insurance To Buy
You can’t go out and just buy any plan you find. There are some important decisions to make. Deciding this is easy.
Gather all of your debts. Your mortgage, student loans, medical bills, and anything else. All of those numbers added up are your starting point.
The next step is to put your paycheck into the mix. You probably have people who rely on your monthly income-stream. Make sure your policy is big enough to replace the money if something awful were to happen. Your policy should be large enough to restore the money for at least 5 years. Most insurance companies have minimum policy amounts of $50,000 or $100,000, however, policies as low as $25,000 are available.
What To Look For When Comparing Life Insurance Premium Quotes
Prior to purchasing life insurance, it is important to compare several policies from different insurance companies in order to ensure that you are getting the best coverage for your specific needs, while at the same time obtaining a premium quote that fits easily into your budget. Just as with any other type of product or service in the market, though, cheapest does not always indicate best, as you will oftentimes “get what you pay for”.
In making a determination as to which life insurance policy is right for you, there are several criteria that you should consider prior to moving forward with the actual purchase of your coverage. These factors should include the following:
Type of Coverage
The type of life insurance you’re considering can make a big difference in the premium that is charged. For example, depending on your age and health status at the time you apply, the premium for $100,000 in term life insurance coverage will typically be considerably less than for a $100,000 permanent life insurance policy – at least initially.
However, over time, the term life policy will need to renew. When this happens, you will be evaluated at your then-current age and this could raise your new premium substantially. While we generally believe that term life is the right choice most of the time, there are times when a permanent life insurance policy makes sense.
Decreasing term insurance policies, typically used to match a mortgage being paid off, have a decreasing death benefit every year.
Are Premiums and/or Benefits Guaranteed?
Check to make sure that the benefit amount and/or the premium amount is guaranteed from year to year – and if they are not, find out how much they will vary. If the premium increases by a large percentage over time, it could actually end up costing you more in the long run.
On the other hand, if the benefits also increase – and you anticipate a future need for the additional amount of coverage – the policy could be a good fit for you. This is especially the case if you don’t have to prove evidence of insurability in order for the benefit amount to rise.
Charges and Fees
In addition to the premium, some life insurance policies may have additional costs. For example, if you cancel the policy or take out your cash value within a certain time period, the policy may hit you with a surrender charge. This is important to be aware of, as any type of surrender charge or other hidden fees could negate an otherwise lower premium cost.
Insurance Company Ratings
Checking the ratings that are assigned to a life insurance company are also a good way to get an indication of how strong the company is financially. This is important because when you purchase life insurance, you want to be sure that the company backing your coverage will be there for the long term.
There are several agencies that are responsible for providing life insurer ratings, including A.M. Best, Standard & Poor’s, Moody’s, and Fitch. Ratings are based on various factors such as the insurance company’s overall financial strength and its ability to make good on its policyholder claims. We generally recommend that you only consider companies with an A.M Best rating of A or A+.
Getting Cheaper Life Insurance
Term insurance coverage is getting cheaper and cheaper, but there are still some ways you can wiggle out ever lower rates. Before you apply, let’s do a little prep work.
To get started, kick the cigarettes out. You know their bad for your health, but do you know how bad they are for your wallet? Enjoying those cigarettes every day doubles your life insurance premiums. Going smoke-free for a year can secure you non-smoker’s rates.
Another way you can make your cheap term insurance policy even cheaper is to work on your weight. During the medical exam, they are going to bring a scale. The numbers on that scale are going to determine how much you pay. Lower numbers equal lower premiums.
Now that you’ve made those changes, you have to do some real legwork (actually it’s going to be phone work). Don’t buy the first quote you get. All insurance companies aren’t equal. Some are much cheaper, while others are going to charge you a small fortune.
With term life insurance rates decreasing over the years, term has become the choice for many families as a cost-effective way to buy life insurance and provide protection to spouses and children. Use our instant term life quoter on this page to compare rates and start shopping for term life for your family.
Hopefully, you have all the information you need to buy a perfect life insurance plan. This video may answer some of your questions about term life insurance, if not, please let us know. We can clear up any confusion you have about cheap term life insurance.
Before deciding on which plan and company to go with, you want to make sure that you have done your research. Read over all of our reviews to learn more about each company and what they have to offer! Colonial Penn is one you will not want to miss out on researching!