5. Determining Length of Coverage
The coverage period of life insurance is important to determine. In this period, you have secure coverage and your payments stay the same.
The terms available are:
- Term to 65
- Whole life
As the primary purpose of life insurance is to cover lost income (or make up for additional costs in the case of stay-at-home parents), the length chosen should reflect the need. Say you have 30 years until retirement, 30-year term or term to 65 insurance would be suitable.
Determining your coverage is a balance between what you want and budget constraints. The shorter the term, the lower the cost. That’s because you are buying less coverage. If retirement is 30 years out, for example, you may choose today to just buy 10-year term to cover the next 10 years.
Renewable and Convertible Options
Most term products have both “renewable” and “convertible” privileges.
Renewable – ability to renew coverage for another term of same length, at a premium level stated on your original contract, without any new underwriting.
Convertible – typically before age 70, ability to convert term coverage to a permanent insurance product, without any new underwriting.
However, because these are guaranteed privileges (the insurance company cannot say “no” to insuring you), your payments may increase dramatically after applying the privilege. The next article, Pricing Comparison, addresses this. If you are able, you should not use these options and instead apply for entirely new insurance when your term is over.
The Risk with Shorter Terms
If you have determined that your need for insurance spans 30 years and are considering 30 year term along with shorter term lengths (10 and 20 years) due to the price difference, be aware of the key risk with shorter terms.
For shorter terms, you will need to renew or apply for new insurance when the term is over. If your risk factors and health history have not worsened, you can simply apply for another short term. However, if the insurance company deems you to be riskier on your new insurance application (beyond just older in age), they may require double or triple the average cost, or decline you new coverage. Your only option would be to use the renewal option on your existing policy.
At time of application, we would go through with you what the cost of renewal would be for you at the end of your term. You can expect this number to be at least 4 or 5 times higher than your initial rate.
Buying insurance long enough to completely cover your risk period does not have this risk. You will pay more upfront, but will not face the risks of applying for new insurance. In addition, down the road your cost will be lower than a newer policy, both because you would be an older person applying for insurance and because you may have higher health risks.