When you purchase term insurance whether it’s life or critical illness, term 10, term 20 or even term 30 the fact that it’s called “Term Insurance” means there is an end date.Image may be NSFW.
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Term insurance is the best choice to cover off risks that eventually go away, like mortgage or business debt, income replacement needs that reduce over time etc. It is the most economical type of insurance to get into… but it’s doesn’t always stay that way after the term ends.
Here is how it works:
Joe Smith has a temporary need to protect and purchases a 10 year term policy. He is a healthy non-smoker so his monthly premiums are $27 a month* for $500,000 of coverage. That’s a good deal to protect half a million dollars of risk. What happens in year 9 of his policy when he realizes he still needs $500k of coverage for longer? he has three options:
- He can let the policy auto-renew but then his premiums will go up to $150 a month, why so much you ask? generally people only auto-renew because they are no longer insurable so the insurance companies need to protect themselves against the risk of claims. Unlike permanent insurance where there is no doubt there will be a claim at some point, most term policies end with the policy holder still alive so there is often no payout. The premiums increases every 10 years like this*:
First 10 year term: $27 a month
Second 10 year term: $150 a month
Third 10 year term: $353 a month
Fourth 10 year term: $990 a month
Policy will expire at age 80. - If he is still healthy he can purchase a new policy for $500k and the pricing will be based on a healthy 45 year old (in this example his new policy would cost him $53 a month for 10 years.) This option is the most economical and can work if you know the risk is still temporary and the person is still insurable.
- The third option is he can convert all or just part the policy from a term policy into a permanent policy, the policy will increase in price substantially but the premiums will then be locked in at that rate for the rest of his life. Depending on the plan he chooses it may contain “cash values” he can take out later in life or use them to increase his death benefit, all tax exempt. Plus permanent insurance is an asset as you know there will be a payout, you just don’t know when it will happen.
Term insurance is very economical and valuable solution but be sure you have a clear long term plan mapped out and watch for those auto-renew dates or you could get a nasty shock when the premium suddenly triple on you.
If you’re working with an advisor they can help you navigate what choice is best for you, now and in the long run.
If you have term policy and no one has talked to you about it let’s have a chat and see if I can “Reynolds Wrap” your risks and give you peace of mind. I am happy to give you a free, no-obligation review of your options.
778-986-9186 or margaret.reynolds@BCinsurancegal.com
*term renewal rates vary depending on the insurance company and type of coverage, this is just one example.
Image may be NSFW.
Clik here to view. Image may be NSFW.
Clik here to view.