Term life insurance is what you get when you commit a heinous felony.  Wait a second, that’s a life term sentence. (yeah, sorry, that was a terrible joke)

Let’s try this again.  Term life insurance is what you get when you want a non-permanent insurance policy that has a lower premium and lasts only for a specific period of time.  Ok, that’s better.

Life insurance is way more complicated than it should be.  Remember when you could add your relationship status on Facebook as “It’s Complicated”?  You can’t do that with term insurance.  You are either single, in a relationship, or married.

Flickr by James Bond

I pride myself on confusing the hell out of my readers as soon as I can in an article.  I know you are thinking to yourself, “What the hell does term insurance have to do with a Facebook relationship”.  Now, I’m sorry for this, but you will see that it all comes together in the end.  So bear with me!

I will break down the rambling I am spewing out as best I can.

Term insurance is the equivalent of dating

Owning term insurance is the equivalent of dating.  It may be a long term relationship, but until you get married, she is not committing to it for the rest of your life.  A term insurance policy is not designed to last for the insured’s entire life.  It is designed to last only a specific number of years.  After the designated number of years have passed, the term insurance policy will increase in value until it becomes unsustainable for the insured to own.

The other category of life insurance is the equivalent of getting married

The other category is referred to as permanent insurance.  Permanent insurance is the life insurance equivalent of marrying.  Or, to reference that awful joke from the first sentence of this article, maybe permeant life insurance is the one that is a life term sentence. (Better joke.  Still pretty awful 😉 )

Permanent insurance is designed to last for the insured’s entire life.  It has higher premiums and may build cash value for the insured.  There are different types of permanent life insurance ranging from whole life insurance, universal life insurance and variable life insurance.

Where does being single come in?

Being single is the equivalent of having no life insurance at all.  For someone who is indeed single with no children, perhaps they do not think they need life insurance.  This person does fall into the only category where it is not a travesty to not have any life insurance.  While it’s not a travesty, it may still be a good idea to have it.  One main reason involves the fact that life insurance requires underwriting.  If someone becomes unhealthy they may not be able to purchase life insurance in the future.  By purchasing it when someone is young an healthy, they are locking in their insurability.  This can be huge for individuals who later have health problems in life.  I’ve met many people who have developed health conditions in their 30’s and 40’s who wish they had locked in their insurability when they were young and health, and their premiums would have been low.

Breaking down term insurance designs

10 year, 20 year, 30 year term

Popular term insurance policies last 10 years, 20 years, and 30 years.  Another design is annual renewable term (ART).  ART insurance increases in price each year.  It will likely start with a lower premium than the 10 year term, and increase in price annually until it exceeds the 10 year term.  Term policies should be non-cancellable and guaranteed renewable.  Every year they have to allow you the option of renewing the policy.  But after the term period ends, the policy will increase drastically.

For example, a 10-year term insurance policy that is non-cancellable, guaranteed renewable, will be guaranteed to be the same premium each year for 10 years.  On year 10, the policy has to renew because its guaranteed renewable and non-cancellable.  So the insurance company increases the premium after year 10.

A current rate I looked up for a 35 year old male with standard underwriting rates for $250,000 of life insurance would be $225 annually for policy years 1 – 10.  After year 10, the policy premium will increase from $225 annually to $1,823 annually.  And each year it will increase further.  So there is not incentive to keep a term insurance policy after the term ends if someone is healthy enough to purchase new insurance.

Annually Renewable Term (ART)

Annually renewable term (ART) is a form of term insurance which does not have a fixed cost annually.  It incrases each year until the insured decides not to continue with the policy.  It will start off as the least expensive payment between 10 year, 20 year and 30 year term insurance, but it will exceed the cost of those insurance policies as time goes on.

Here are current rates to compare to the above example with a 35 year old male with standard underwriting and $250,000 of insurance death benefit:

As you can see it is only $2 less per year for this policy than for a 10 year term policy.  After the first year, the policy will be more expensive than it would be for an equivalent 10 year term.

Each company has it’s own rates, so this example is one company I requested a quote for.  There are other ART policies that may not increase as quickly.  Do some research if you are looking into any of these policies.

The Risks

There are obviously some risks purchasing the above 10 year term or annually renewable term examples.

You may want life insurance when you are older

If you want your policy to last longer than 10 years, 20 years, 30 years, this isn’t going to be for you.  You are going to need either a longer term period policy, or even a permanent policy if you wish to own a policy for life.

Some people want insurance for estate planning purposes when they are older and some just wish they had had it to leave more money for their loved ones.  Whatever the reason, if an individual believes they want life insurance to last into their old age, term insurance isn’t for them.

You may not be able to qualify for life insurance when your term ends

When your term ends years down the road, you may be a much more out of shape heaver version of yourself with more health problems.  This can cause you to be a less desirable candidate for the insurance company.  The company may deny you coverage, or charge you a high premium for the company to take on the risk.  So you will pay more if you purchase a new policy years later.  You may not be able to find a company who wants to insure you just like you may not find a good mate later in life when you gain 35 pounds, lose your hair, and develop major health problems.

Term insurance is perfect for the commitment phoebe; you will know the date the relationship with your policy ends.  So remember, until your insurance advisor asks you, “do you take this permanent life insurance policy to be your lawfully wedded husband/wife”, the policy is a term insurance policy and its not committed to you for life.