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The Affluent Insurance Advisor

Term Life Insurance

Term life insurance can be compared to renting an apartment. When you're renting an apartment you are allowed to stay in the home provided you pay the monthly rent charges. Over time that rent increases. When you stop paying the rent you are no longer permitted to live in the apartment. And finally, at some point when you move out of the apartment, there is no residual value (equity) that you can take with you.

Bringing our conversation away from the renting versus owning analogy, the general uses of term life insurance are for those insured's that either have a very short term need for the coverage -- i.e., to cover a mortgage in the event of death -- or for those whose cash flow cannot support the purchase of a permanent policy.

Assuming one is healthy; while term insurance has the smallest short term premium outlay it also has the lowest long term utility. Less than 0.25% of all term insurance purchased is ever brought to claim. One reason term has lower premiums is because the insurance companies rarely pay out on a large percentage of these policies. While the insured is comforted knowing they've protected their family in the short run, in the long run the premiums paid rarely result in a death claim.

Term life insurance is typically bought with an initial level premium period followed by an enormous jump in premium the year the level period expires, with gradual increases from there. In today's marketplace, it is quite common for term insurance to expire at age 80. That means, even if a policy owner continued to make the enormous premium payments during the insured's later years (which from a practical standpoint they wouldn't) the insured's 80th birthday would cause them to walk away from the policy with no remuneration for the years of high premiums paid. Thus it is uncommon for a policy holder to continue such a term policy after the level premium payment period ends.

It is typical to see level periods of:

  • Annually Increasing: the premium starts relatively low and then increases slowly from year to year.
  • Level 10: 10 years of level premiums followed by a significant increase in year 11.
  • Level 20: 20 years of level premiums followed by a significant increase in year 21.
  • Level 30: 30 years of level premiums followed by a significant increase in year 31.

The short of this conversation is that affluent clients tend to be purchasers of insurance for long periods of time as their needs change from providing financial security to their families to owning the insurance for practical estate building and protection reasons. The decision to purchase term insurance typically arises from either a very short term need for the coverage or a lack of adequate cash flow to contribute to a permanent policy (one that will eventually pay out a death benefit at life expectancy).