How Does Term Life Insurance Work?

[Robert Barney]

No lapse UL policy, with coverage to age 121:

Payable to 121: Banner Life, $2,561

Payable to 100: North American, $2,493

Payable to 65: North American, $3,293

20 Pay: North American, $3,668

10 Pay: North American, $5,663

And the reason I would buy the whole life is...?

 

[Full Throttle]

Willfully ignorant is worse than just plain ignorance. I wish my client's situations were as black and white as in your posts.

 

[Norwayguy]

No lapse UL policy, with coverage to age 121:

Payable to 121: Banner Life, $2,561

Payable to 100: North American, $2,493

Payable to 65: North American, $3,293

20 Pay: North American, $3,668

10 Pay: North American, $5,663

And the reason I would buy the whole life is...?

My only comments...GUL is great as long as everything else in your life goes well...lose your job and miss a payment on a GUL anf what happens to the no lapse guarantee...the 20 pay and 10 pay don't have the same csv accumulation which gives the client additional options...having said that if the clients only concern is DB then GUL would probably be the way to go.

 

[crimsontideagent]

Is there any that don't lose the NLG if a payment is missed accidentally.

 

[VolAgent]

Yes, many GUL can be "caught up". Call the HO and have them calculate the necessary premium to get the policy caught up and protect the secondary guarantee. FYI, Mass's GUL has that feature. Also, I recall being told that if years down the road, you can no longer afford the premium, Mass will let you reduce the face amount on the GUL and turn it into a paid up policy.

 

[Ami]

There's one thing that guaranteed never to change in life, and that is that change will happen. Hundreds of thousands of Americans bought "term home" - low down-payment, low initial mortgage payments - in that misguided belief that change will not happen. It did this time as it did not all that long ago leading to the S&L crisis.

Yes, the story of "Alice in Wonderland" has been told many times; likewise, "you only need to life insure your income" with or without the added "...until the kids grow up and the mortgage is paid" is pitched again and again and again.

"Term" may be suitable where, due to budgetary realities, the entire amount of coverage needed cannot be purchased as a WL or where is is absolutely known - and I stress, absolutely - that the insurance coverage need is just for a defined temporary need, and certainly not beyond that. Term may also be suitable in situations where the premium is to be income deductible as an expense for tax purposes.

To the question "How Does Term Life Insurance Work?":

Insurance, including life insurance, is a means of risk transfer. The risk is transferred from the insuring party to the risk dilution pool ("insurer"). It's just pure common sense that the greater the risk the higher the risk transfer fee (aka "premium"). In "term" insurance - particularly where the risk is so low that it qualifies for elite rates - the risk is so minuscule that it approaches the level of risk that is assumed by the insurer for "accidental death" insurance.

Risk transfer fees for transfer of the risk to the risk dilution pool enterprise (aka "insurance premiums") are made up of:
1. - actuarial projections of the risk probability and cost to the dilution pool(s) (insurer(s)) in assuming the risk, plus
2. - contingency reserves and reinsurance (secondary part of the transfer to additional risk transfer dilution pools, aka "reinsurance", plus
3. - risk assessment (aka "underwriting") costs and projected claims processing costs, plus
4. - distribution costs, including the multiple levels of commissions, advertising, recruitment, administrative, overhead, etc., plus
5. - taxes and fees, plus
6. - general overhead, staff salaries and executive salaries and bonuses, plus
7. - profits (yes, the shareholders also want to be paid)

Projections of the risk assumption cost to the risk dilution pool enterprise (insurance company) are annual probability based, for example "what is the probability that a 40 year old female who qualifies to be classed in the elite "risk class" would pass away during the policy year?" In other words, the pure risk component of all life insurance is Yearly Term (YT).

In brief and simplified: to produce a term policy where the premiums would remain level for 20 years, the projected PV of premiums for each year of the YT is added up, adding a further load to allow/reserve for projected deterioration of the risk in terms of "class" (and thereby to account for the added risk of modification of a YT to YRT). A formula is then employed to "levelize" the premiums for the hypothetical 20-year YRT to produce a 20-year level premium term (LPT) product. A similar process is employed for the creation of a 10 or a 30 year, etc. LPT product, as well as for GUL and WL. Looking at it from another perspective, as the reserves accumulate, the actual amount "at risk" is projected to decline over the years - in other words, "reducing risk-assumed, level premium contract". The DB is the sum of the remaining risk assumed, plus the risk reserves attributed to the contract. Likewise in WL; however, with a major difference in that in WL the risk transferor has conditional access to the reserve portion whereas in "term" (s)he doesn't. Lapse assumptions allow for "trimming" of the levelized-premium YRT period, thereby providing for a reduction in the yearly level premiums produced by the formula. If the lapse assumptions/projections are proven conservative, profit rises. Conversely, if lapse rates were under-estimated, profits suffer (and in the extreme case, potentially the claims paying ability of the risk dilution pool).

Any for profit business, including insurance companies, want to increase profits. Reduction in the level of risk (repetitive re-qualification by the insured) and increased lapse rates in the latter half of the level term premium period of LPT term insurance both serve that end. From the perspective of the bean counters and shareholder relations dept., not to mention the bonuses to the executives, term insurance sales are, at least conceptually, great profit engines for the insurance companies. WL, on the other hand - and particularly if sold with the consumer's interest in mind and with full disclosure - can become an erosion factor on the insurers' profit margin:
- less likely to be replaced and thereby lapsed;
- less likely to lapse due to a couple of missed premium payments
- doesn't have induced lapses (actual or nearing yearly skyrocketing renewal rates after the initial levelized period or another agent knocking at the door to generate new FYC through a replacement sale)
- more likely to mature (and have to pay out as a living benefit) in the event that the insured is still alive at age 100;
- more likely to have the reserves cashed or used as collateral for a "must grant" loan to the policyholder;
- if not wrongly induced by a third party to lapse, WL will become a claim sooner or later (in other words, if both term and WL are not lapsed, there is a slight probability of a claim under a term insurance contract and 100% probability of a claim in WL)

The above is reflected in premium pricing and pricing trends. The insurance companies are literally stepping on each other to draw in the lucrative term insurance business and are not all that thrilled to take in a whole lot of WL business.

 

[Mike Wilson]

Hello,

Term life insurance work for a particular period of time. It gives benefit for a particular period of time.

Thanks
Mike Wilson

 

[nembra]

From what i know a life insurance is like a legal contract between the policy holder and the insurer where the insurer agrees to pay a certain accumulated sum of money to the nominees of the policy holder in case of illness or demise. The policy holder has to pay the insurer a pre determined amount at regular intervals or in lump sums.

 

[arnguy]

From what i know a life insurance is like a legal contract between the policy holder and the insurer where the insurer agrees to pay a certain accumulated sum of money to the nominees of the policy holder in case of illness or demise. The policy holder has to pay the insurer a pre determined amount at regular intervals or in lump sums.

WRONG! I DON'T KNOW WHERE YOU CUT AND PASTED THAT FROM, BUT IT IS WRONG! Although it is a contract between the polcy holder and tyhe insurer the agreement is to pay a stipulated sum of money called the face value, not an accumulated sum, to the beneficiaries of the policyholder upon demise (death), not illness. The policy holder has to pay the insurer a pre-determined amount called the premium over the term of the plocy, i.e., a set number of years.

 

[DLierMN]

No lapse UL policy, with coverage to age 121:

Payable to 121: Banner Life, $2,561

Payable to 100: North American, $2,493

Payable to 65: North American, $3,293

20 Pay: North American, $3,668

10 Pay: North American, $5,663

And the reason I would buy the whole life is...?

I haven't seen this mentioned yet, but with most GUL's on the market you can illustration guaranteed paid up policies at any age. You can skip premiums and catch up with most products. If you only pay the minimum premiums to guarantee the death benefit you should not be concerned about cash values since that is not the goal or purpose of these types of products and instead it is the lowest cost, long term guaranteed death benefit.

Banner's product however does actually accumulate cash values on a guaranteed basis much like a traditional whole life. It is designed to endow at 121. Here's an example:

40 male preferred plus non tobacco
Lifetime guaranteed coverage paid up at 65 = $3998
Cash value at 80 = 43665 guaranteed, 57858 projected
Cash value at 100 = 157767 guaranteed and projected

The only reason that I even mention cash value in this situation is that it is a nice feature if the owner decides to surrender the contract. With most GUL's there would be no guaranteed csv but with this product the premiums are competitive and the csv is there too. The best of both worlds?


Anyway - you would be very suprised at the number of calls I get from licensed insurance agents that have no idea at all about term vs. whole life or UL. It is almost shocking.