When most people think of term insurance, they consider the television ads that show how John Doe got a $1 million policy for only $38 per month. You know the ads; they’re all over the television, internet, Facebook, and even Twitter. But for many people, if they look closely at the disclosure at the bottom of the ad, they read where the policy is good for ten years. Ten years, why is that?
Certainly, when an insurer offers a quote during an advertisement, they are going to put the best scenario out there to appear as if everyone can buy insurance at rock-bottom prices. Not to mislead, or attempt to bait and switch, but to show viewers how much cheaper term insurance is that what they might have thought. The bottom line is that term insurance is inexpensive and is typically the best way to insure against leaving surviving loved ones strapped for cash.
Term Insurance is more than Just a Death Benefit
Term insurance is probably the best vehicle to use when it comes to a death benefit. Since the policy is issued for a limited period (5 to 30 years) and only the cost of insurance is calculated in the premium, the cost of term insurance is less than all other life insurance products.
Term insurance is also inexpensive because the mortality rate (people dying while insured) is very low; they are not permanent and most policyholders either convert or cancel their policy within ten years of purchase. Compare that to whole life which lasts a lifetime, and you can see how term claims payments are much lower than whole life policies.
There are, however, two living benefits that can be found in a term policy that can make it an even more attractive purchase.
Accelerated Death Benefit
The accelerated death benefit is built into most term policies, and if not, most companies will let you add it as a rider. The accelerated death benefit provides for the insurer to pay out a percentage of the death benefit if the policyholder is diagnosed with a terminal illness.
The percentage of the death benefit the insurer will payout depends on the policy contract, but many will pay 50 percent of the death benefit or more. It’s not a loan; it is typically paid so the terminally ill policyholder will have the funds needed to pay for final expenses and medical expenses during their final days, but there is no mandatory use of the money.
Since the funds are not a loan to the policyholder, the amount paid out under the accelerated death benefit will be deducted from the death benefit payable to the beneficiary. With most insurers, the terminal illness must be diagnosed and confirmed by a doctor, and most companies require that death must be expected within a year.
Return of Premium Rider
The return of premium rider is being offered by many insurers today, and all of them will charge an additional premium to add it to your policy. This rider provides for the insurer to return all premiums paid into the policy if the policyholder survives the expiration date of the policy. Some carriers will even return a portion of the premium if you elect to collect it near the end of the policy period. In every case, you will need to check with your agent.
Unlike the accelerated death benefit, the return of premium rider is not free. In most cases, the insurer will charge an additional 20 to 40 percent of the standard premium.
Depending on your age when you purchase your policy, this additional premium is minimal and makes very good sense to consider this rider.
How the Return of Premium Rider can Supplement Your Retirement
Let’s use the example of John Jones, a 30-year-old male non-smoker who is in excellent health:
John Jones is a married man with one child who is concerned about providing for his surviving loved ones if he should die unexpectedly. He wants to pay living expenses for five years, pay off his mortgage of $300,000, pay the remaining personal debt of $20,000, and leave enough money to pay his son’s college tuition which he expects to be about $150,000. Based on these needs, John asks for a death benefit of $750,000.
John’s normal monthly premium for a 30-year term policy would be $48 per month.
John requests the return of premium rider that costs an additional 30% or $14.40.
John’s total monthly payment for the insurance and the rider is $62.40.
John now has the opportunity to invest the $22,000 into his retirement plan to enhance his standard of living once he decides to stop working. Yes, he may be able to invest the money he spent and earn a much better return, but remember, he had a $750,000 death benefit during that 30-year period if he were to die unexpectedly plus the life insurance that would have been provided by his employer.