WHEN PREMIUMS CAN BLOW UP YOUR TERM LIFE INSURANCE POLICY
GUARANTEED INITIAL PREMIUMS DO NOT GUARANTEE SUCCESS
SUMMARY
A client’s 30-year term life insurance policy allows for a 20-year, guaranteed initial premium. But starting in Year 21, those premiums will become so exorbitant that the policy will collapse.
TERM LIFE: A CASE STUDY
Recently, a client showed us his $500,000, 30-year term life insurance policy purchased from a reputable, highly rated company. Issued when the client was 61, it has been in effect now for over 16 years and is guaranteed to age 95.
Figure 1. Benefit Description. Example of a client’s life insurance policy.
Figure 2 shows that in the contract, his initial premium is guaranteed for the first 20 years of his ownership of the policy. In effect, he has and would pay to the end of the 20 years an annual premium of $3,315, which will not go up until after the 20th year.
Figure 2. Initial Premium Guarantee Period: 20 Years. Example of the verbiage contained within the Life Insurance Policy
When you read the wording of the contract, it does acknowledge that the premiums will increase each year after Year 20, “but will never exceed the guaranteed premiums as shown on Page 4.” Sounds great, right? After all, how much could the premiums reasonably rise? A lot of people would simply glance over this information, putting their trust in the insurance salesperson without taking a closer look at the all-important Page 4:
Figure 3. Page 4 Policy Data: Table of Guaranteed Annual Premiums. The above example lists the Policy Year along with the Guaranteed Annual Premium.
That’s right; in Year 21, this client’s annual premium could be as high as $152,620, and the limit will only go up from there. Whether that ceiling or a value below it becomes the new premium, payment will become untenable as soon as Year 21 begins. Because there is no cash value in a term policy, there is nothing to mitigate the cost of insurance. In three short years, this client’s policy is going to blow up. Not only will he lose his coverage, he will be—and is already—at an age that will make the premium of any new life insurance policy similarly prohibitive.
Understanding what’s coming down the road for you in term life insurance like this is necessary. Having a qualified advisor analyze your policy can save you a lot of trouble in the long run. If you’re not sure about the risks you might be taking with your own policies, it’s time to talk to Day Hagan.
Please share this blog with anyone you think could benefit from the information in it.
Sincerely,
Natalie Brown, CFP®
Director of Client Services
Day Hagan Private Wealth
—Written 06.25.2020.
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