When you purchase your life insurance policy, obviously, the most important factor is the type of coverage you are going to receive. You want to make sure that your loved ones are adequately provided for in the event of your passing. However, while coverage is extremely important, there is another factor to take into consideration: The amount you will pay for your life insurance policy. The payment into a policy is called a premium payment.
Life insurance coverage comes with a cost, and that cost has to be paid out of your pocket. Given this fact, you are going to want to make sure that the insurance you purchase is something that you can afford. The last thing you want is to purchase policy coverage that will end up putting you into financial turmoil.
While you may purchase your life insurance at a certain price, it is important to note that the price you pay could increase. Premiums – the cost that you pay for your insurance – could go up. Why? That’s actually a pretty complicated question to answer, but here’s a look at some of the things that affect your life insurance premiums.
A Look at Term Life Insurance
Term life insurance rates are on the rise for the first time in a long time. The increase in price has been minimal, but they can certainly impact your pocket in a negative way.
Given the fact that the premiums are increasing, waiting to purchase life insurance is simply not an option anymore.
What is Term Life Insurance?
Term life insurance is insurance coverage that extends for a certain period of time; for example, a period of 30 years. Should you pass away within that period of time, or term, your life insurance provider will have to pay out the amount your policy covers to your beneficiaries. For instance, if your term life insurance policy covers a period of 30 years and offers a $500,000 coverage amount, and you pass away within that 30 year period, the insurance company that provides your coverage will have to pay whoever the beneficiaries you have named the $500,000 that your policy covers.
Level Premiums Vs Increasing Premiums- Why Your Premiums May Rise
A very important distinction to make in life insurance is the difference between level premiums (premiums that stay the same) and non-level premiums (those that rise, or even fall over time). Term life insurance is typically guaranteed to be a level premium for the duration of the stated term (10 year, 20 year, 30 year, ect). Sometimes term life insurance is not a level premium, and it actually goes up a little bit each year. These non-level premium policies may appear very cheap early in the policy, but they become extremely expensive in the later years.
You may also get to the end of your term, and the policy has an option to renew coverage at a new higher rate. Typically these rates are extremely high and someone should only choose this option if they are unable to get a new policy (typically because of health issues).
Beware the Universal or Variable Universal (UL or VUL) Trap
You may also run into difficulty with a universal life policy, or a variable universal life policy, where your premium payments are increasing every year. Your agent may have shown you an illustration with level premium payments, and you probably thought that your rate can’t go up. Unfortunately, this isn’t true and you may be stuck paying an extremely high price for your life insurance later in life.
The cost of life insurance in a UL or VUL policy is NOT LEVEL. If you were shown an illustration showing level premiums, the illustration was assuming that the cash value in the policy would grow at a certain rate. Often times, the assumed growth rate is extremely high, even as much as 12%. In reality, a variable policy may actually have a negative growth rate if the investments within the policy go down (like when the stock market drops). A UL policy may grow at a slower rate if interest rates drop, like they did from 2000-2010. If the cash value doesn’t grow fast enough, or if you miss a premium payment, you may need to put in more cash later on. Sometimes, your stuck putting in way more cash if you want to keep your policy. Many people stuck in this situation are unable to afford the cost of insurance. NEVER invest in a UL or VUL policy unless you fully understand how it works and what is actually being illustrated to you. Whole life insurance has level premium payments, so as long as you don’t take any loans you are safe from rising premiums.
Low Term Life Insurance Rates
For a long period of time, the premiums on term life insurance policies were extremely low. In fact, there was a period of time when the premiums feel as must as 70 percent!
There are three factors that have kept term life insurance premiums so low for such a long period of time. These factors include:
Longer life expectancy. If you life through the length of time that your policy covers, the policy expires and the insurance company has to pay nothing. As life expectancy has increased, term life insurance holders have outlived their policies. As a result, the life insurance companies that wrote these policies were making more money, which meant that they could lower their rates.
Increased competition. Thanks to the Internet, the competition between insurance companies increased. People were able to shop around for term life insurance policies, and obviously, most of these people chose the policies that had the lowest premiums. In order to attract people, insurance providers lowered their rates.
High stock prices. As the stock market affects everything, it also affected the price of life insurance policy premiums. The better the stock market, the lower the prices on premiums.
Reasons the Rates Have Increased
Despite the fact that the mortality rate continues to rise, the price of term life insurance policies is rising. Why? – Because of the current economic climate. Some of the biggest financial institutions in the world have taken huge hits, including the mega insurance provider AIG. As a result, investors have been less eager to lend money at the low rates that they had previously been lending it for.
Companies that sell term life insurance need to put in a significant amount of capital in order to cover the policies. Insurance providers utilize cash reserves and lines of credit to provide that cash; however, once the government had to bail out mega financial institutions, the sources of cash either became null and void, or they became astronomically expensive.
Given the fact that the money has all but dried up, or has gotten extremely expensive, life insurance premiums have increased.
How Much have the Rates Increased?
The good news is that the increase in term life insurance premiums is definitely not astronomical. They are creeping up, and rate increases are low – about 5 percent or so. Though the price is rising, it’s still pretty low. In fact, the premiums are still very close to the lowest rates that they have ever been.
The increase is so minimal, in fact, that most term life insurance policy holders have only had to pay about a dollar more a month for their insurance.
How it Affects You
How do these rising term life insurance premiums impact you? Well, obviously, they mean that you will have to pay more money out of your pocket.
The premiums are expected to continue rising, though slowly. In order to avoid having to pay higher prices, the best thing you can do is purchase a term life insurance policy now. The sooner you purchase a policy, the less you will have to pay. Get an insurance policy that has locked in rates so that you don’t have to pay more money as the prices increase.
If you already have life insurance, you might want to consider if you should refinance it. Since the rates are still very low, it may make sense for you to dump your old policy and take out a new one, especially if you are paying high rates. However, do keep in mind that if your health is deteriorating, it is probably a better idea to hold onto the policy that you have instead of getting a new one. Why? – Because poor health greatly impacts the price of premiums. If you have developed a health condition such as high blood pressure or heart disease, you will be considered a red flag to an insurance company because there is a greater chance that you could pass away during the term of your policy – and if you pass away, they will have to pay out.
The one thing that really makes sense in the current state of term life insurance premiums is that if you don’t have insurance, or if you want to buy more, you should really do so now. Though the economic state will improve eventually, and the average life expectancy will continue to rise, it doesn’t seem like the premiums for term life insurance will significantly drop any time in the near future. In fact, for the foreseeable future, it appears as if the rates will continue to rise – though not astronomically.
Tips for Buying Life Insurance
If you are shopping for life insurance, whether you don’t have a policy yet or you want to buy more coverage, the important thing to do is shop smart.
When purchasing life insurance, make sure you do your research. The Internet is a very valuable tool for shopping for life insurance. You can easily compare rates and get quotes from the comfort of your own home. However, before you opt for a specific policy, do make sure that you speak to an agent from the company you are considering. You will be able to find out more detailed information about the policy and any increases in premiums that you may have to pay at some point.
The bottom line is this: Despite the rising rate of premiums, and the fact that they can increase over time, getting coverage is definitely worth your while. In the event that you do pass away, your life insurance policy will protect your loved ones and provide them with the financial security that they will need if they can’t rely on your income.