19 Aug I hear ads for cheap term insurance. Is it too good to be true?

Q. I keep hearing cheap prices for term insurance. How can the insurance company afford such inexpensive premiums?
— Skeptical

A. Yours is a great question.

It’s a common one, too, because it certainly appears counterintuitive when you compare the premiums and the benefits.

As with things that seem “too good to be true,” there are several facets of this that need to be considered.

In general, term premiums are “cheap” in comparison to the benefit because virtually everyone outlives their coverage, said Ed Gaelick, a Chartered Life Underwriter and Chartered Financial Consultant with PSI Consultants in Glen Rock.

He said most term plans today lock in rates for a chosen number of years, such as 10, 15 or 20.

“The premiums are very attractive during these years since statistically and from an actuarial standpoint, you’ll outlive that term period,” he said. “Once you reach that point, you can usually keep the plan but at premiums that can be 10 to 20 times that of the initial period and then premiums increase each year thereafter.”

Consequently, most insured people will let the plan lapse before an insurance company pays a claim, he said.

“So they can certainly `afford’ such inexpensive premiums when you factor in the statistics of a large population,” Gaelick said. “And the actuaries are really good at determining how many insureds will die out of a large group. They simply don’t know who will die before they statistically should.”

So for everyone who had protection for those years, some families will collect proceeds and the insurance companies will make money, he said.

It’s important to note that the ads you see or hear or read will quote the most favorable rates for the shortest term of years, making the advertised premiums appear especially attractive, he said.

“They are true but do those premiums apply to you? Rates are determined by age, gender, tobacco use, substance use, build, overall current health and medications, past history of any serious health issue, family history and more,” Gaelick said. “Factor in any adverse history and rates will be much higher than advertised. Just a solid reason to consult with a professional insurance broker.”

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This story was originally published on Aug. 19, 2020.

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