New York -- Looking for low-cost term life insurance? Traditionally, you'd have bought the variety known as "annually renewable term."
For some buyers, though, that's no longer the policy of choice. A growing number of insurers are putting lower prices on five-year and 10-year level term, also known as "re-entry term".
Even when re-entry term is cheaper, however, you have to think twice before buying it. At the end of the five- or 10-year period, you might find yourself paying considerably more.
Here's how these types of policies work:
All term insurance offers pure protection. If you die, your beneficiary gets money. There are no cash values for you to use.
With annually renewable term (ART), your premium rises every year. With level term, you generally pay the same annual premium for five or 10 years. The premium is usually guaranteed for the full period. In the first few years, level-term policies cost more than ART. By the end of the term, they cost less.
I recently asked SelectQuote in San Francisco for the names of five cheap $150,000 policies for men and women at ages 30, 40 and 50. A majority of the price quotes were for level-term %J insurance.
If that's all there were to it, level term would clearly be the best buy. But there's a serious complication.
At the end of the term, your policy is not automatically renewable at favorable rates. You have to "re-enter" the policy by passing a medical test. If you can't, your premium will jump.
Take Federal Kemper Life Assurance's 10-year term policy for a 40-year-old man. He'll pay $260 a year for 10 years for a $150,000 policy. After that, he's switched to ART. If, at age 50, he requalifies for favorable rates, his ART coverage will start at $506 and increase every year. But if he's less than a top health risk, his premium will jump to $710 and go up from there.
Services like SelectQuote show the renewal rates on re-entry term for a healthy person and mention that prices could go higher. But they don't show the premiums paid by people who don't pass the medical test. So always ask.
Which type of insurance is best for you, ART or level-premium term? Here's how to make the decision:
* If you need coverage only for 10 years, consider 10-year level term. These policies might suit single parents who need life insurance only until their children get through school. Or breadwinners who want extra coverage only until the house is paid for.
* If you plan to hold term insurance for more than 10 years, go for traditional ART. With level term, it's not worth gambling that you'll pass the physical that lets you keep paying reasonable rates.
Glenn Daily, a fee-only insurance consultant based in New York City, compared the cost of ART with that of 10-year level term for a 32-year-old man who wouldn't pass the physical. In Daily's example, the high price the man pays in the 11th year overcomes his savings in the previous 10 years. (This assumes that money not spent on insurance is earning 5 percent interest.)
A few companies, including Jackson National Life Insurance in Lansing, Mich., and Berkshire Life in Pittsfield, Mass., offer 10-year term policies that renew you regardless of your health. They generally cost more than other level-term policies. *
If you're an inveterate price-shopper, you might gamble on ART even for shorter periods than 10 years. It may take six years or so before 10-year level term becomes cheaper than ART. If you shop for new, low-priced ART coverage every five years, you may come out ahead.
(But note: This strategy depends on your staying healthy. You have to be able to buy new ART insurance at favorable rates. And watch out: Some cheap ART policies also require you to pass a physical after five or 10 years.)
Depending on the policy, your age and how you handle your money, low-cost ART insurance might be cheaper than level term even over the full 10 years, says Milton Brown of the Insurance Information Institute in South Dennis, Mass.
Assume, he says, that you're earning 6 percent on your savings rather than 5 percent. In this case, ART might be cheaper for women at age 40 and men at age 30, although at other ages,
level term is cheaper.
How do you tell which is better for you? When comparing term policies, ask your insurance agent for the five- or 10-year net-payment index. The lower number is the better buy.