Term Insurance FAQs

There are questions surrounding term life insurance. Life insurance is a big deal in any household. Without it, you’d have to worry about your loved ones. There are many options to choose from when it comes to buying life insurance. Our experts answer some questions revolving around this topic.

Question – Do term policies carry a waiver of premium provision?

Answer – The waiver of premium rider, which is a common rider to most permanent or ordinary whole life policies, provides that premiums are waived if the insured becomes totally and permanently disabled. This rider is available on many renewable term insurance policies.

Company practice is not uniform with respect to the inclusion of the waiver of premium rider in a new policy obtained by converting a term policy that includes a waiver of premium rider. Some companies do not allow a waiver of premium rider in the converted policy unless the insured shows evidence of insurability. Some companies will permit the converted policy to include a waiver of premium rider without evidence of insurability, but will restrict its operation to disabilities that are the result of injuries sustained or of diseases contracted after the date of conversion.

Question – If a person is in good health, does it pay to apply for new insurance rather than to continue to renew a YRT policy?

Answer – The hassle and inconvenience of applying for new insurance every year while one maintains his or her health is not worth it. However, it may pay to purchase new insurance every ten years or so if the individual is still healthy.

Insurance companies can afford to charge relatively low premiums in the first few years after issue because they have had the opportunity to screen their applicants and select only those who are in good health. Insureds tend to remain in good health for the first few years after the policy is issued. However, over the years, the pattern is for some of the policyholders who are in the best health to drop the coverage and for those with the worst health to continue their coverage. This is known as adverse selection because the worst (most likely to die early) risks remain and the best (the most likely to survive to older ages) risks no longer support the pool of dollars available to pay claims.

Consequently, the insurers must build additional renewal premium charges into the policy in later years to cover the additional mortality costs associated with this adverse selection against the insurance company. If an individual is in good health, he can apply for new insurance by showing evidence of insurability and once again enjoy the lower “select” mortality charges associated with new policy issues.

This process of adverse selection against the insurance companies is what has led many companies to offer reentry term insurance policies, which are also sometimes called select and ultimate term insurance policies. As long as the insured continues to show evidence of insurability at periodic intervals (typically every two, three, or five years) the renewal premiums, which are based on the lower select mortality charges, remain comparable to the premiums for newly-issued policies.

If the insured’s health deteriorates, the renewal premiums increase and reflect what is called ultimate mortality charges. In general, if the insured fails to show evidence of satisfactory health, the renewal premiums are higher than the renewal premiums for regular renewable term, which are based on data from both select and ultimate mortality experience.

Question – What is universal term insurance?

Answer – Universal term is a type of flexible term insurance contract. Similar to, and actually a variation of, universal life insurance, it allows the policyholder to set up a customized pattern of premiums and face amounts. The insurer also may allow changes after issue, within limits.

Question – Is the cost per $1,000 of face value on term policies lower for higher total face amounts?

Answer – Yes, most companies charge a lower rate per $1,000 for greater amounts of coverage. The break points vary by company. Term Insurance, like whole life or any other form of permanent coverage, is “cheaper by the dozen.”

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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