By: Al Lurty, Fellow of the FLMI, Retirement Income Certified Professional, and Wealth Management Certified Professional
If you’re a potential life insurance consumer, you probably are seeing the value of today’s guaranteed level premium term products. These products lock in a competitive premium rate for a fixed number of years that is guaranteed not to change for say 10, 15 or 20 years. However, you may be wondering what the ideal coverage period or duration you should buy. Premium rates of course are higher, the longer the coverage period you purchase. Assuming your need for life insurance isn’t a very short-term one, here’s a simple hypothetical example that helps demonstrate the value of various term durations.
In my hypothetical example, I assume a case for a female, age 35, who qualifies for the best rate underwriting class for $1 million of coverage and is looking to buy coverage for 30 years. I used a leading insurer’s term product to identify rates for 10, 20 and 30 years. In this example, my analysis shows that using today’s rates buying the 10-year product, on both a total outlay and a present value basis over 30 years, is less expensive than the 20- or 30-year products.
BUT this conclusion assumes that upon reaching the end of the 10-year period, the woman can still purchase coverage at today’s rates for the remainder of the 30-year period (using current rates for a female who is 45 ten years from now). This can be a dangerous assumption in that we don’t know which direction future term premium rates will go but given today’s uncertain environment and profit pressure on carriers, I personally wouldn’t want to bet that term rates in the future will necessarily be as low or lower than they are today. You can study this and make numerous calculations for various combinations of age, gender, rate class and coverage amounts.
The uncertainty of future premium rates might help convince you to lock in the maximum available duration today, considering affordability. An important observation is this example doesn’t consider what might happen should an adverse health event occur, and the women could no longer qualify for the best rates at the end of the 10-year period, or that she may even become uninsurable.
This post clearly discusses one of the key cautions when buying term insurance: you may be better off locking in the longest duration now (e.g., buy a 30-year product instead of a 10-year product) at a time when you are younger and healthier. This decision might save you a lot of money and regret later.
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