15 May You get what you pay for with term insurance

 Q. I keep hearing about how term insurance is so cheap, but hey, there is no such thing as a free – or cheap – lunch. How can I know the policy I’m considering is a good one?

A. You’re right about lunch.

Term insurance policies offer a death benefit. Rates are much cheaper for these kinds of policies compared to permanent insurance — whole or universal life policies — which offer a death benefit and an investment component, or a savings component.

But let’s just get down to term insurance.

Premiums for term policies are tied to mortality expectations, or plainly, how long you are expected to live, said Ed Gaelick, a Chartered Life Underwriter and Chartered Financial Consultant with PSI Consultants in Glen Rock.

“If you are young and healthy, premiums will be `cheap’ since odds are you will outlive the coverage. Premiums are higher for those older,” he said.

Term insurance has changed somewhat over the years. It used to be that term premiums increased each year as you got older. That was perceived unfavorably and the industry developed products that locked in rates for a number of years, Gaelick said. You can now get 10, 15, 20, and if young enough, even 30-year level term rates.

“That seems to sit better with those paying premiums — until the term expires,” Gaelick said. “Then rates jump to numbers so unattractive or prohibitive, most people will drop their coverage. Exactly what insurance company actuaries plan for. You get out just when they are at a higher risk of paying a claim.”

He said most will re-apply, take a new exam and if healthy enough, and lock in for another term period. Of course rates will be higher than the original policy because you are older, but likely much lower than those that were scheduled following the term period on your initial policy.

Gaelick said there is certainly no such thing as a free or cheap lunch because the vast majority of those insured by term will indeed outlive their coverage. That means those outliving their coverage had peace of mind, but they paid for something for which they got no benefit.

“Is there a place for term insurance? Of course. It fits well for a temporary need, some business purposes and for those without the cash flow to secure a permanent plan,” he said.

Looking at rates for term, Gaelick said they will vary dramatically based on which carrier you choose, the amount of coverage, any optional benefits, years locked in and how you’d be rated (i.e.: Preferred Best, Preferred, Standard, Smoker, etc.). So you shouldn’t assume you’re get the best rating if you are on medication, are overweight or have some other health-related issues.

So is the policy you’re considering a good one?

“Your beneficiary will know the policy you are considering is a good one when the company pays the claim,” Gaelick said.

When you look at any insurance product, start by making sure you’re dealing with a reputable company, said Alison Williams, a certified financial planner with Stonegate Wealth Management in Oakland.

She recommends you check the company’s ratings at www.ambest.com or www.standardandpoors.com.

“Their ratings take into consideration the creditworthiness of an issuer,” Williams said. “This is extremely important because if the insurance company goes under, you may not have coverage when you need it.”

Next, Williams said, give the company’s customer service number a call.

“Customer service representatives should be polite, helpful and informative,” she said. “Remember, these are the people you or your loved ones will need to deal with if the policy is ever put to use. If they aren’t accommodating, you may want to consider another company.”

Once you have two or three reputable companies that meet your customer service criteria, begin comparing prices.

Williams said the policies should be very similar with regards to terms, riders and waivers. You can’t compare apples and oranges.

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This story was first posted in May 2015.