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 because 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, 20, 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.
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, like the size of plan to buy. Deciding this is easy.
Gather all of your debs. 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.
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 equals 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. If not, please let us know. We can clear up any confusion you have about cheap term life insurance.