Term life insurance is cheaper, but should be chosen carefully

March 05, 2000|By JANE BRYANT QUINN | JANE BRYANT QUINN,Washington Post Writers Group

For buyers of term life insurance, the marketplace is changing fast.

Prices are rising for the most popular form of coverage. Insurers are bringing out new types of policies, and it's important to know what your choices are.

The price increases affect the coverage known as "level-premium term." These are fixed-price policies. They guarantee that your premium will not rise, for as long as the policy is in force.

Until now, the favored policy was 20-year level-premium term. You paid the same price for 20 years. Younger people often bought 30-year level term.

But state insurance commissioners thought that insurers weren't holding enough money in reserve to pay all the future claims. So they raised the reserve requirement, starting Jan. 1. That has had the effect of raising your price.

Nothing has changed for five- or 10-year term policies.

But if you want to lock in the price for 15 to 30 years, you now have to pay more. The increases run from 15 percent to 80 percent.

For shoppers who don't want to pay that much, the industry has come up with a hybrid. You can still get a term policy that lasts for 20 or 30 years. But the premium is guaranteed for only the first 10 years. After that, it can go up.

So here's the term-policy choice, for people who need lengthy coverage: Pay more to have your premium guaranteed for the policy's full term. Or pay less, take a 10-year price guarantee, and trust that the premiums will remain reasonable after that.

What you decide may depend on your age and pocketbook:

Are you young, with children? Consider a policy with a full, 20-year or 30-year price guarantee. The price isn't that much higher than it was two months ago, and you'll feel secure.

A superhealthy man, age 30, might pay $540 a year for $500,000 in coverage, says Byron Udell, president of AccuQuote, an insurance price-quotation service.

Are you middle-age, with young children or a spouse who will need continuing support? The older you are, the more your coverage will cost. For you, the new hybrids might be just right, says Bob Barney of Compulife Software, another price-quote service.

A superhealthy 45-year-old man, seeking $500,000 in coverage for 20 years, might be offered two choices, Barney says: (1) Pay $890 a year, guaranteed for 20 years. (2) Pay $710 a year for the first 10 years, with the future price open.

If the insurer holds the premium level, charging the same $710 for the second 10 years, the buyer will save $180 a year. That's $3,600 over 20 years or $6,249 if you invest the savings at 5 percent. Even if the insurer raises premiums in the second 10 years, the hybrid could still cost you less. In this example, it's cheaper as long as premiums rise by less than 65 percent, Barney says. Those are pretty good odds.

Will you need the coverage for longer than 20 or 30 years? Consider buying annually renewable term (ART). At the start, you pay less for these policies than you would for level term. Every year, however, the premiums go up.

Here's the advantage: You can keep an ART policy to age 70 or longer. By contrast, 20- or 30-year term expires when its time is up. You can renew it, but you will have to pass a medical exam. If your health isn't perfect, the new policy will cost more than you thought.

One warning about the selling of hybrid "20-year term" insurance: The salesperson should make it clear that the price is guaranteed only for the first 10 years, says Chris Kite of Fipsco in Des Plaines, Ill., a company that provides the industry with marketing software. Insurers don't play fair if they let you be surprised.

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