Term Life Insurance Advantages and Disadvantages
There are some big advantages to buying a term policy.
- Term premiums are generally much lower than whole or universal life insurance premiums.
- Because it is cheaper, consumers can afford to buy larger policies.
You do need to understand a couple of basic reasons that temporary coverage will be cheaper than permanent coverage.
- Term policies do not grow a cash value. Premiums simply pay for coverage. Once the policy has expired, it has nothing else to offer. The policy holder will not be covered, and they will not be able to exchange the policy for any money.
- Term policies are temporary so the insurer is not taking as big of a risk. They underwrite each applicant, and they only issue policies when they expect the applicant to survive. When an insurer accepts a whole life policy, they assume a much greater risk.
Because a policy only provides coverage, and no cash value, it is considered pure insurance. And as the name implies, a term policy, will expire after a certain amount of time. Common terms may be 10,20, or 30 years, but this is still temporary. For these reasons, term coverage provides the advantage of cheaper premiums. A lower price means that consumers can afford to buy larger policies.
Everybody likes to hear that term is cheaper. But consumers should understand that also means that when their policy expires, they will have no value or coverage left. The product has been consumed.
Return of Premium Riders
To make temporary life coverage more attractive to potential clients, top insurers came up with a additional choice that applicants can make on some life policies. This is called a return of premium (ROP) rider. This benefit will cost a bit more every month, but it will return all premiums paid under some conditions.
To Collect the ROP Benefit:
- The covered person must survive the policy. In other words, the policy did not pay benefits.
- The policy must have been kept in force. For most people, this means that the premiums got paid.
- Some riders may also pay out a percentage of the full benefit if the policy is terminated before the end of the contract.
- You must check the terms of your specific policy for full details.
How Much will a Return of Premium Rider Pay?
Consider this example. Keep in mind, that these numbers are meant to illustrate ROP riders, and do not apply to any particular policy.
Let us say that Mr. Smith could pay $30 a month for a $150,000 policy which will cover him for 30 years. This would be called a $150,000 20 year term policy. Also assume that he could add the ROP rider for another $5 a month.
If he pays $30 a month for 30 years, his coverage will cost him over $10,000. However he will be a lucky man because he survived his policy!
He could have been just as lucky. He could have paid $35 a month for his coverage and the ROP rider. At the end of his policy, he could get a check back for $12,600. I get this figure by simply figuring out how much $35 a month is when paid monthly over 30 years.