I Fell Into The Term Insurance Trap!

I Fell Into The Term Insurance Trap!

by Mike Prestwich

Tools Insurance Calculator Articles Life Illustration Traps Consumer Life Insurance Basics Sales Ethics AM Best Ratings	Mike in 1993 - Age 40	In 1993 I thought term insurance was a bargain. Ten years later I am not so sure. When I was 40 years old, I bought a $500,000 10-year level term policy for $495 per year. I knew that the premium would increase after 10 years, but I reasoned, "In 10 years I will earn more money. My mortgage will be paid down and I will be out of debt. My pension assets and Social Security will provide income for my family. I probably won't need life insurance in 10 years. Besides, if I still need insurance, I can always buy a new policy."
	Mike in 2003 - Age 50	I was wrong! My mortgage is higher than it was 10 years ago. I now have three cars and three car payments. With kids in college, my debt is higher now than ever before. My wife, children, grandchildren and I now spend twice as much money as we did in 1983. I need more life insurance today than I did 10 years ago! Here's the trap: In 2003 my "initial premium guarantee period" expired and my premium increased from $495 per year to $4,465 - nearly ten times higher. It goes up each year thereafter. At age 65 the premium will be $20,420 - until it finally reaches $270,395 at age 90. Unless I can qualify for a new policy I will be locked into these high rates. Someday the premiums on this policy will unaffordable and I will lose my life insurance.
	At age 50 I have a better understanding of human mortality than I did when I was 40. Many of my friends are overweight. Some have high blood pressure; several have had heart attacks. Three cousins near my age have died. Life insurance companies base premiums on the risk that death will occur. Younger people and healthy people represent less risk to the company and therefore pay less. The key is to guarantee yourself low rates while you are young and healthy. Here's How I Escaped From The Term Trap: I am lucky to still be healthy. I have normal blood pressure, but am overweight, so I qualified for a new life insurance policy with standard (instead of preferred) non-smoking rates. I bought a $150,000 Universal Life policy with a $450,000 term rider for a total death benefit of $600,000. The premium is $10,000 per year level for 20 years. Does $10,000 per year sound high? It is, but it is only double the premium of my current term plan, and is less than half of what my term plan will cost at age 65. Here is why I chose this plan: I now have permanent insurance protection that is guaranteed to last during my whole lifetime. My premiums are flexible; I can pay between $5,072 and $11,746 during the first year. My death benefit is flexible; I can keep it at $600,000 or reduce it to $150,000 after my kids are through college and my debts are paid. This plan builds cash value and has a 4.50% guaranteed interest rate. The current rate is 4.95% which is competitive in today's market. In 20 years the guaranteed cash value will be over $210,000 - more than I paid in. Assuming the non-guaranteed interest and mortality rates, the cash value will be over $262,000. In 20 years the cash value is guaranteed to be sufficient to keep my policy in force -- even if I stop paying premiums. The company is large, sound, and reputable. It is a member of the IMSA and has an A+ AM Best Rating. All of its policyholders receive equal treatment - all get essentially the same interest and mortality rates. My agent is a skilled professional who has been in business for more than 20 years. He has an MBA, and has earned the CLU, and CFP professional designations. I am fortunate to have escaped the Term Trap before my health deteriorated to the point where I could not qualify for a competitive life insurance policy. More importantly, my family now has the assurance that they will be able to maintain their lifestyle no matter when my death occurs in the future.