A question we get a lot when quoting life insurance to our clients is; why is term life insurance so much cheaper than permanent life insurance? The honest answer is the life insurance carriers have been making money from the sale of term life for years. The life insurance industry estimates that term life payouts are less than 1% annually. One percent of all term policies are ever paid in a claim.
Don’t freak out and think that the insurance carriers are scamming the public and refusing to pay out the claims owed. This is not the case, most clients either outlive their term life policies, let them lapse, or convert to a permanent policy.
Why is Term Life Insurance Cheaper?
Term life insurance has always been a low premium life insurance product compared to permanent life insurance. It takes a minimal amount of money to go towards funding the death benefit. The reason for this is because a significant portion of the premium calculation resides in the payout ratio. The insurance carriers do account for usual mortality costs and risks, but the fact of the matter is that most people outlive their term policies. This is one reason insurance carriers have been lowering term life insurance premiums.
Term life insurance policies don’t accumulate cash value so there is no need to set these funds aside which keeps term life premiums low. Products like whole life and universal life, a significant portion of the premium must set aside as a reserve to pay for future death benefit which will be paid if the insured continues to pay premiums until he or she dies.
The final reason why term life insurance is getting cheaper is that people are living longer. The targeted audience that insurers are looking for today are between the ages of 25-45. This age group has lower probability of death.
CSO Mortality Table Changes
The insurance industry moved from the 1980 CSO mortality tables to the 2001 CSO mortality tables in 2008. This change allowed term life insurance policies to become cheaper and allow the insurance carriers to lower premiums. Most insurance carriers saw this as an opportunity for competition others did take this opportunity to keep rates the same and raise their profits.
The way that insurance carriers weigh risk is with the CSO mortality tables. This is how they determine what to set premiums at based on you risk classification. In the 2001 CSO mortality, they discovered that in some scenarios that males were outliving females. This was a reversal of the trend of females living longer than men. Also, in the new mortality tables, smoking had a more negative impact on death rates which meant smoking rates increased with most insurance carriers.
Also, in the 2001 CSO mortality tables, the tables were extended from age 100 out to age 120 which affected term insurance rates positively. In other words, people were living longer which affected term insurance rates by making them cheaper.
Level Premium Term Products
Annual Renewable term life (ART) is the simplest type of term insurance. With ART you pay premiums for one year and the insurance carrier only calculates charges for one year of death protection. On you policy anniversary, your risk is reevaluated and the insurance carrier increases your premium to reflect this. Level premium is the term used most often with term life insurance products today. What level premium means is the premium remains the same for the selected term period, usually somewhere between 5-30 years.
Level premium term allows the insurer to collect more than one year’s cost of insurance. The insurance carrier invests the excess premium and uses the interest to keep term life insurance pricing down.
What is the Right Amount of Term Life Insurance to Purchase
How much life insurance you need can be a tricky question. First you will want to consider these factors:
- Any debts that you may have (credit cards, mortgage, loans, etc.)
- Future income that would be loss
- If you own a business
- College Education if you have kids
You will want to factor in all of these financial burdens that would be left to your family in the event of an untimely death before making the decision on how much term life insurance that your family would need.
How to Find the Best Life Insurance Quote
The best way to find the life insurance policy that fits you is to shop around. Life insurance is not a one size fits all type of product. Your individual needs and desires need to be considered before purchasing a life insurance policy. It’s always best to find and experienced agent that represents multiple companies to help guide you through all the information out there.
Things to Consider
Before going out and just buying the first policy you see there are a few things to consider:
- You want to make sure that the premiums and benefits are guaranteed. You will not want any surprises in the future when you will probably need the coverage the most.
- Always ask if the policy you are about to purchase has any charges or fees attached. Depending on the type of policy you purchase, fees and charges could be attached, which could affect how much premium you pay.
- Always make sure you purchase your policy from a highly rated life insurance company. With over 800 companies to choose from this can be confusing, but by working with an independent agent you can take a lot of the researching out of the equation.
Term life insurance has always been the go-to product for business owners and families for decades and the trend is not going to change anytime soon. With people living longer, term rates will continue to go decrease. Term life insurance is an affordable way to protect your family from financial disaster in case of an untimely death. Always ask questions before making any kind of life insurance purchase and always team up with an experienced life insurance agent to help guide you through the process.