Strategic Considerations of Term Life Insurance

(6 of 7)

Strategic Considerations of Term Life Insurance

Term life insurance can fit into your financial planning. Here are some things to consider.

Buying term and investing the difference

Cost is one of the attractive features of term life insurance. Because it is so much lower during one’s younger years when one has less probability of dying, it can play an indirect part in one’s financial planning. "Buying term and investing the difference" is a strategy in which a policyholder sets aside money equal to the difference between a term and a whole life policy. The person then invests this money elsewhere, typically a tax-deferred investment such as an individual retirement account. Over time, he or she builds up enough funds to approximate what would have been provided by a whole life policy. Proponents of this strategy argue that you can spend less overall and get a return that is equal to or better than what you could get with a whole life policy. However, the burden is on you to be a disciplined saver and knowledgeable investor, and you take the risks upon yourself. With whole life insurance, the investment risk is assumed by the insurance company.

Convertibility

Many term life insurance policies offer the option to convert to a whole life policy. For some, this is a useful option, especially if they first bought the policy with an excellent rating but later suffered a health issue that jeopardized future term life insurability. In this case, the person could convert to a whole life policy under favorable terms. The conversion is good for a certain number of years or up to a certain age.

Health and Proof of insurability

Because term life insurance coverage renews periodically, proof of insurability is a major factor to consider. The odds of your health making you uninsurable increase as you age. What if you became terminally ill during a term of coverage? You may not be insurable when it comes time to renew. Your health is therefore a factor when considering term life, the more so as you get older. Some policies, however, do offer guaranteed reinsurability that does not require proof of insurability.

For those who fear being uninsurable, other options, such as buying term and investing the difference, may be attractive.