The Lowest Term Life Insurance Rate - Why Shouldn't I Buy It?
The lowest term life insurance rate is not always the best rate. Here are a couple reasons why.
First, all of the competitive term insurance companies have a conversion (or extension) option. The lowest term life insurance rate may not qualify for this conversion, and that could be a serious problem. Let me explain.
Conversion is the right to exchange any portion of your life insurance policy for longer coverage later with no health questions asked and no underwriting involved. If you originally qualify for a "Preferred Plus" rate, you can convert to a "Preferred Plus" rate, regardless of your health. Term life conversion can be especially important if you ever have a negative change in health and decide later that you want coverage for longer than the original term period you choose.
Some life insurance companies only allow you to convert for the first 10 policy years or possibly to age 65 only. Some companies also only allow you to convert to very expensive Whole Life insurance coverage that most people may not be able to afford. If the lowest term life insurance rate is with one of these companies, choosing that rate may not be the best decision.
There's a few of the competitive term insurance companies that allow you to convert for the full level premium term period to a maximum of age 75 or 80 and they allow you to convert to their super-competitive Universal Life insurance plans. Some of these Universal Life plans can be structured to have term insurance-like rates (i.e. guaranteed level for shorter durations like 10, 15, 20 years, etc.). Selecting one of these companies might be the best decision, even if that company did not offer the lowest rate.
So term life insurance policies that are convertible for full level premium term period and that are convertible to competitive Universal Life insurance plans are the ideal term policies to purchase. The cost difference from these plans compared to the absolute lowest rates may be insignificant and worth paying a couple dollars more for the better conversion.
I've had some clients tell me "I won't need life insurance for longer than the term I'm purchasing", but how could anyone possibly know now what their situation may be in 10, 15, 20 or 30 years?
A perfect example of why someone may want to convert their term insurance coverage is my client "Peter" who had a 10 year term life insurance plan. In the 9th year of his 10 year term, he was diagnosed with Cancer. Due to the type of cancer he was uninsurable for new coverage. His renewal rate after the 10 year term was over was about $4000 per year. He was able to convert his policy to a Preferred rate of just over $1000 per year and the rate was guaranteed level for a new 10 year period.
Secondly, due to a new segment in the financial services industry called Life Settlements, conversion of term life policies has become more important than it was in past. Life Settlements are transactions between life insurance policy owners and financial institutions in which you could sell your insurance policy to these institutions for cash!
I was recently able to get a client of ours $245,000 for a $900,000 policy that he no longer needed and was going to cancel. If he cancelled, he would have gotten nothing back. He was extremely happy about getting $245,000 as opposed to the alternative.
For term insurance policies to be sold, they have to still be convertible and the more competitive the conversion cost is, the better the potential offer on the sale of the policy. Life Settlements have made some term policies more of a potential asset like they've never been before.
So just remember, the lowest term life insurance rate may not always be best and could cause you to lose out on valuable benefits in the future!
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