Term life insurance - level vs renewable

[coalcracker]

Hi all. I am in the process of obtaining a life insurance policy, and have decided that term is the way to go based on advice on this board and elsewhere. I have decided on 2.5M, 30 year policy based on this being ~6-7X my expected annual income as of next year; I used this simple estimate because there are so many other uncertainties at this point in my life as far as children, spouse's employment, etc.

I have 2 options: level monthly premiums at $220/month, or annual renewable starting at $120/month and slowly rising over the term of the policy. The "break even" for both options is approx 22 years, at which I would have paid the same amount of premium for each, but overall with the renewable rate payments I would pay almost double in premiums for the life of the policy based on high rates in the last 8 years. The insurance agent is recommending the renewable rate if there is any possibility I would switch to a whole life policy at some point, which I am almost certain I would not, but nothing in life is 100%. He says if I AM certain I would never switch to whole, stay with the level policy. I also have the option to do 50% level and 50% renewable, with the thought that I would either drop or switch to whole life the renewable portion of the policy when the rates begin to increase.

Any and all advice on this would be much appreciated. Thanks!

 

[brewer12345]

First, make sure you are buying your policy from a financially strong (and preferably mutual) company. You will be "married" to them for a long time; pick a pretty one.

Second, how do you know what the path of the ART premiums will be? Are they baked in stone or can the insurer jack up the rates beyond what is illustrated if they have poor experience on the business they are writing?

 

[dgoldenz]

The break even point you calculated might be based on current rates, not the guaranteed ART rates as brewer alluded to above. Sounds like a policy from Northwestern Mutual, Mass Mutual, or a similar company if they are pushing the "buy ART, convert to whole life early" mantra. I'll bet their premiums are much higher than other companies. How old are you? Why only 6-7x income? If you are under 50 and your family depends on your income alone, you probably need more coverage than that. Term insurance is cheap and if you are making ~$400k, you should be able to afford a little higher premium for the right amount of coverage. Please tell me you have a VERY good disability insurance policy with that kind of income.

 

[dgoldenz]

Just as a quick comparison, let's say you are either a 30, 35, or 40 year old male in perfect health. Running the rates, I get the following for $2.5 million of 30-year level term with an A+ rated company:

30 years old - $143.50/month
35 years old - $169.75/month
40 years old - $250.69/month

Based on that information, I'm going to guess you're between 30 and 35 if a mutual company is quoting you $220/month.

Here's what $4 million of 30-year term would cost you with the same assumptions:

30 years old - $226.19/month
35 years old - $268.19/month
40 years old - $397.69/month

So if you're 30-35, you can get ~$4 million of coverage for the same price as $2.5 million with big mutual. If you died the day after policy issue, would your wife prefer to have $4 million or would she rather have $2.5 million and the comfort of knowing the company may have had an A++ financial rating instead of A+?

 

[coalcracker]

Thanks everyone for the replies, very helpful. Let me tell you more about my situation.

I am 31 and a physician in my last year of fellowship. As part of getting a "true-own" disability policy, I also applied for life insurance since I had the medical exam and got a clean bill of health. I got approved for 2.5m. Not sure if it would have been more had I applied when I am attending next year.

I had thought of not even getting the life insurance now and waiting until my wife and I have children, probably within the next few years, but I am inclined to get it now because you never know if a health problem will develop.

 

[dgoldenz]

Thanks everyone for the replies, very helpful. Let me tell you more about my situation.

I am 31 and a physician in my last year of fellowship. As part of getting a "true-own" disability policy, I also applied for life insurance since I had the medical exam and got a clean bill of health. I got approved for 2.5m. Not sure if it would have been more had I applied when I am attending next year.

I had thought of not even getting the life insurance now and waiting until my wife and I have children, probably within the next few years, but I am inclined to get it now because you never know if a health problem will develop.

On second thought, it must be Guardian because the other mutual companies don't offer 30-year term as far as I know and Guardian also has the best disability policy around, especially for physicians with a specialty definiton. You should take what you can get now and then you can apply for more coverage later with justification of additional income. Other companies may be able to offer a higher maximum coverage amount now though....Guardian tends to play things on the safer side if that's the company you're referencing. As you said, you never know what can happen to your health. I have seen too many people put off buying coverage and then it costs them twice as much because of a health problem.

 

[chinaco]

+1 on Brewers comment.

I think your answer lies in how long you intend to hold the policy.

 

[dgoldenz]

+1 on Brewers comment.

I think your answer lies in how long you intend to hold the policy.

Most people intend on things, then circumstances change. If he is planning on having children, a 30-year level term would probably be best. Most people who buy ART get tired of the ever-increasing premiums.

 

[Independent]

Technically, you should accumulate the premiums at whatever interest rate you're currently paying on loans when you make the comparison. But, in your income bracket, this is all a rounding error anyway.

 

[rayvt]

The basic reality is that your chance of dying goes up each year. There's no evading that fact.

This means that the cost of life insurance has to go up each year. Note that "cost" means dollars-of-premium per dollar-of-insurance, and is usually quoted as "dollars per thousand".

People tend to look not at the dollars-per-thousand but at the absolute number of premium dollars. And they don't like that the premium goes up each year. 'course, people don't like to die, either---but there's no way around Mother Nature.
Insurance companies give people what they want by hiding the fact that the cost naturally goes up.

1) High premium: Level premium for a fixed insurance amount -- overcharges for the early years to offset the high cost of the later years. Means that if you die early, you lose.

2) Low premium: Level premium for the term of the policy, but the amount of insurance decreases periodically. Each year you pay close to the "true" premium, computed as dollars-per-thousand. This is called ART, or annually reducing term.

ART is as close to true, pure insurance as you can get. It is generally available as an annual policy that is guaranteed renewable for a certain number of years. Problem is, the later years have very high $/K, so the amount of insurance is pretty small.

Because, for example, if you get it at age 35, the life expectancy is 42 years, so it has to be priced as if you'll die at 77. The age 76 premium will be almost as much as the death benefit.

What you want to do is "re-enter" every 5 years. This is kinda like swapping out for a new policy, with less paperwork.
If you make it to age 55, then you didn't die between 35 and 55, so your L.E. is longer and the re-entry premium ($/K) will be lower.

That's why Whole Life Insurance is a rip-off. Sure, in the later years your death benefit is the same, but the amount of true insurance is the benefit minus the cash value. So the dollars per thousand of INSURANCE is pretty high.

 

[Emeritus]

1) High premium: Level premium for a fixed insurance amount -- overcharges for the early years to offset the high cost of the later years. Means that if you die early, you lose.

You have this one backwards. Anytime you die 'early" in a level premium term insurance contract you still "win" I.e. if you pay 1000 dollars a year for 500,000 in insurance and die in year 5 your estate is a net winner.

Term insurance is priced on the assumptionthat many people will drop the insurance, so it is overall a very good buy if you keep up the policy. so if you drop the policy you lose, but if you die you "win"

 

[dgoldenz]

Sorry rayvt, but the advice to buy new coverage every 5 years is bogus. The odds of you getting a Preferred Plus risk class every single time as you hit 35, 40, 45, 50, 55, 60, etc. is slim to none. The coverage gets more expensive as you get older even if your health never changed, and what happens when your health changes?

The bottom line is you should lock in the amount of coverage you need for the time period you need it (plus a few years for wiggle room in case something changes). Playing games with the numbers to try and save a few bucks when you make $400k is just being cheap.

 

[rayvt]

You have this one backwards. Anytime you die 'early" in a level premium term insurance contract you still "win" I.e. if you pay 1000 dollars a year for 500,000 in insurance and die in year 5 your estate is a net winner.

Nope, you have it backwards. The true cost (cost, not price) of insurance is an upward sloping line, lower at younger ages and higher at older ages. Level premium term insurance is a flat horizontal line. Draw these and you'll see that the premium at the early years is higher than the cost, and lower that the cost at later age. You pay extra in the early years to offset the shortfall in later years. In essense, you prepay some of the later premium cost in the early years.

So if you die or cancel the policy ealy, you've [pre]paid extra money for coverage that you won't get.

 

[rayvt]

Sorry rayvt, but the advice to buy new coverage every 5 years is bogus. The odds of you getting a Preferred Plus risk class every single time as you hit 35, 40, 45, 50, 55, 60, etc. is slim to none. The coverage gets more expensive as you get older even if your health never changed, and what happens when your health changes?

But that's not what I said. What I said (or meant to say) was that you get a N year Guaranteed Renewable Term policy. The premium & coverage stays the same for a certain period (5, 10, 15, 20, or 1 year) and then you are guaranteed to be able to renew the policy a year at a time at a pre-specified price. Since that price is written into the policy, the cost climbs pretty steeply in the later years.
But---and what I said was---you can do a "re-entry" every few years to get a lower rate if you are still in good health. If you aren't, you just stay at the original contract terms. So every 5 years you can potentially reset to a better price but can never get a worse price.
Re-Entry Term Life Insurance: Definition from Answers.com

 

[dgoldenz]

Nope, you have it backwards. The true cost (cost, not price) of insurance is an upward sloping line, lower at younger ages and higher at older ages. Level premium term insurance is a flat horizontal line. Draw these and you'll see that the premium at the early years is higher than the cost, and lower that the cost at later age. You pay extra in the early years to offset the shortfall in later years. In essense, you prepay some of the later premium cost in the early years.

So if you die or cancel the policy ealy, you've [pre]paid extra money for coverage that you won't get.

If you die, you have nothing to worry about since you won't be around to collect. The amount "extra" you will have paid will pale in comparison to the death benefit received.

 

[Emeritus]

Nope, you have it backwards. The true cost (cost, not price) of insurance is an upward sloping line, lower at younger ages and higher at older ages. Level premium term insurance is a flat horizontal line. Draw these and you'll see that the premium at the early years is higher than the cost, and lower that the cost at later age. You pay extra in the early years to offset the shortfall in later years. In essense, you prepay some of the later premium cost in the early years.

So if you die or cancel the policy ealy, you've [pre]paid extra money for coverage that you won't get.

Cancel sure but if you die NO

If you pay 5000 5x 1000 per year and then die and your estate gets 500,000 your estate is PLUS 495,000

So cancel, yes, but die no

 

[rayvt]

I'm not sure what you guys are going on about. Yes, if you die your insurance will pay out $500,000. So you ignore the premium amount because it is much smaller than $500K?? Sounds like something an insurance agent would say when he was blowing smoke up your a$$.

Look, here's an example of what I'm talking about. Quotes from Allstate, guaranteed renewable term, $500,000, "standard select" rating, monthly premium:
For a 30 YO: level 30 yrs (ages 30 to 60): $72.19

For a 30 YO, level 10 yrs (ages 30 to 40): $32.81
For a 40 YO, level 10 yrs (ages 40 to 50): $45.94
For a 50 YO, level 10 yrs (ages 50 to 60): $101.50

You can see that for the first 20 years, you are over-paying ($32 & $45 vs. $72), and under-paying for the last 10 years. In essense you prepay the shortfall of the last 10 years by overpaying in the first 20 years.

The 1st 10 yrs you overpay a total of $4725.
The 2nd 20 yrs you overpay a total of $3150.
The 3rd 10 yrs you underpay a total of $3517.

If you take the 30 yr policy and die or cancel any time in the first 20 years, you have paid too much. You've prepaid part of the premium for ages 50-60 but won't receive the benefit. And the insurance company won't refund any of this pre-payment.

Now, an insurance agent will focus on the $500,000 death benefit and wave off the difference in premiums as trivial. Indeed, when compared to $500,000, $72 or $32 is paltry.

But someone who is financially astute will see that one way you'll get $500,000 of insurance for $72 but the other way you'll get $1,000,000 of insurance (twice as much) for $65. If you die at age 39 your wife might like to know why she only got $500,000 instead of $1,000,000.

So, the overall cheapest way is to get the 10 year policy and then reset to the re-entry rate every 5 years. That will get you the policy cost that is as close as possible to the true cost of the life insurance. You won't overpay in the first 2/3rd of the duration. You will, however, pay more in the last 1/3. But the cost is the cost. It's not that you pay less for ages 50-60 with the 30 year term---you just pay it between 30-50.

 

[dgoldenz]

I'm not sure what you guys are going on about. Yes, if you die your insurance will pay out $500,000. So you ignore the premium amount because it is much smaller than $500K?? Sounds like something an insurance agent would say when he was blowing smoke up your a$$.

Look, here's an example of what I'm talking about. Quotes from Allstate, guaranteed renewable term, $500,000, "standard select" rating, monthly premium:
For a 30 YO: level 30 yrs (ages 30 to 60): $72.19

For a 30 YO, level 10 yrs (ages 30 to 40): $32.81
For a 40 YO, level 10 yrs (ages 40 to 50): $45.94
For a 50 YO, level 10 yrs (ages 50 to 60): $101.50

You can see that for the first 20 years, you are over-paying ($32 & $45 vs. $72), and under-paying for the last 10 years. In essense you prepay the shortfall of the last 10 years by overpaying in the first 20 years.

The 1st 10 yrs you overpay a total of $4725.
The 2nd 20 yrs you overpay a total of $3150.
The 3rd 10 yrs you underpay a total of $3517.

If you take the 30 yr policy and die or cancel any time in the first 20 years, you have paid too much. You've prepaid part of the premium for ages 50-60 but won't receive the benefit. And the insurance company won't refund any of this pre-payment.

Now, an insurance agent will focus on the $500,000 death benefit and wave off the difference in premiums as trivial. Indeed, when compared to $500,000, $72 or $32 is paltry.

But someone who is financially astute will see that one way you'll get $500,000 of insurance for $72 but the other way you'll get $1,000,000 of insurance (twice as much) for $65. If you die at age 39 your wife might like to know why she only got $500,000 instead of $1,000,000.

So, the overall cheapest way is to get the 10 year policy and then reset to the re-entry rate every 5 years. That will get you the policy cost that is as close as possible to the true cost of the life insurance. You won't overpay in the first 2/3rd of the duration. You will, however, pay more in the last 1/3. But the cost is the cost. It's not that you pay less for ages 50-60 with the 30 year term---you just pay it between 30-50.

And all of your analysis is null and void because if you try to buy new coverage every 5 years you will find that as you get older and your health changes that you will come out on the short end of the stick every time. I see people try to play this game all the time even when the difference is minimal and then they pay for it big time when they find out they have diabetes, heart issues, elevated PSA levels, elevated kidney functions and lab numbers, etc etc.

Buy the amount of coverage you need for the time you need and you never have to worry about whether you got the "best deal" or not. You have the piece of mind to know that your beneficiaries will be taken care of. If you could know the exact date you're going to die, you sure could buy the shortest term policy. Since you don't know that information, how can you make a blanket statement and saying that buying a shorter term is the best option? I am guessing you are a CPA, engineer, or have another type of analytical job. There's no need to make things more complicated than they are just to save a few dollars a year. People who nickel and dime life insurance are the ones that end up paying 10 times the price to buy it again when they turn 55 or 60. Always amazes me that people will pay $1000/month for health insurance but don't spend $1000/year on life insurance to cover the need.

On a side note, those rates from Allstate are very high. MetLife at standard plus for a 30 year old term policy on a 30 year old male is only $52/month, not $72/month. If Allstate's "standard select" is their best risk class, the equivalent with Genworth would only be $35/month.

 

[Emeritus]

I'm not sure what you guys are going on about. Yes, if you die your insurance will pay out $500,000. So you ignore the premium amount because it is much smaller than $500K?? Sounds like something an insurance agent would say when he was blowing smoke up your a$$.

You wrote:

"So if you die or cancel the policy ealy, you've [pre]paid extra money for coverage that you won't get."

and earlier wrote

"1) High premium: Level premium for a fixed insurance amount -- overcharges for the early years to offset the high cost of the later years. Means that if you die early, you lose."

But you don't pay for any coverage after you die. and your premiums paid while you are alive are far less than what you get paid so even if you overpaid for the coverage you still "win" If your claims that that you overpaid and that is what you are calling "losing" then say so.

If you say "if you die early you overpaid" i will agree.

I fully agree that if you cancel you had a bad financial deal but if your die you don't. You were a winner even if the insurance is overpriced.

That is why moral hazard analysis exists and why policies have exclusions for suicide, because even overpriced insurance is a good deal for people who have a higher risk than calculated. I agree with the rest of your post. But I found that when I shopped for 20 year term insurance that level payment term insurance was offered at below the actuarial value of increasing payment term. It's a market anomaly due to high cancellation rates during the term The cross subsidy from canceling purchasers drove down the annual premium