Why is Term Life Insurance So Cheap?
Term life insurance is known for its affordability, and several key factors contribute to its lower cost compared to other types of life insurance:
- 1. Lower Likelihood of Payout
- Statistical Probability: Many term life insurance policies do not end up paying out a death benefit because the insured person often outlives the term of the policy.
- Policy Duration: Since term life insurance covers a specific period, the risk to the insurer is limited to that term.
- 2. No Benefit Beyond the Term
- Finite Coverage: If the insured individual lives beyond the term of the policy, the coverage simply ends, and no benefit is paid out.
- Risk Management: This finite coverage period reduces the overall risk for the insurance company, allowing for lower premiums.
- 3. No Cash Value Accumulation
- Pure Insurance: Term life insurance is often described as “pure” insurance because it doesn’t include an investment component.
- Simplified Structure: Without the cash value component that is found in whole life or universal life policies, the insurer’s costs are lower, which is reflected in the premiums.
Alternative: Combination of Permanent and Term Life Insurance
For those seeking both affordability and long-term coverage, combining a permanent plan with term life insurance can be an effective strategy:
- Maximizing Working Years: A higher face amount term policy can provide substantial coverage during the most financially vulnerable years, such as when raising a family or paying a mortgage.
- Long-Term Security: A lower face amount permanent plan ensures that there is coverage in place for life, providing long-term security and peace of mind.
- Flexibility and Comprehensive Coverage: This approach balances the need for substantial coverage during key years with the desire for lifelong coverage.
The difference in premium with straight-term insurance vs a term/UL combination. 500k Face Amount. Age 40. Male.
- 20yr Term – $31.00 a month
- 20-year Term with 50k UL – $85.00 a month.
Term/Permanent Combination Structure
- Initial Coverage: Initially, the policyholder has both a term life insurance policy (for a higher coverage amount) and a permanent life insurance policy (with a lower coverage amount, like $50k).
- Term Policy Expiration: When the term life policy expires, or “falls off,” the permanent life insurance remains in place.
Advantages of the Term/Permanent Combination
- Continued Coverage Without Re-Underwriting: After the term policy expires, the permanent life insurance continues without needing new underwriting.
- Protection Against Health Changes: As health can change with age, having a permanent policy in place ensures continued coverage regardless of any health issues that may arise later in life.
- Age-Related Concerns: With a permanent policy, coverage is not subject to change due to age. In contrast, obtaining a new policy at an older age can be significantly more expensive and challenging due to age-related underwriting criteria.
- Guaranteed Coverage Amount: The permanent policy guarantees a fixed coverage amount (e.g., $50k), providing assurance of some insurance benefit regardless of the term policy’s status.
Term Life vs. Combined Term and Permanent Life Insurance
|Term Life Insurance
|Combined Term and Permanent Insurance
|Fixed, specific term
|Term plus lifetime coverage
|Lower, more affordable
|Higher due to permanent policy component
|Accumulates in the permanent part
|Benefit Beyond Term
|Permanent policy continues
The affordability of buying term life insurance stems from its structure as pure insurance without a cash value component and the lower likelihood of payout. Combining term and permanent life insurance can be a strategic choice for those seeking a balance of affordability and continuous coverage.
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