Avoid “Shock and Awe” – Do You Clearly Understand How Your Term Insurance Policy Works?

As I travel, often times I’ll hear a radio advertisement about how an “insurance provider” helped an individual with a “$500,000, 10 year term policy for under $30 a month. You can see similar ads on TV, or your local newspaper. It may also occur when “agent Jim” meets with you face-to-face and pitches low cost term life insurance.

The “Shock and Awe” for the one who purchases such a policy will occur at the end of that 10 year term period.

About 8 years ago I was asked to contact a policyholder who 10 years earlier, at age 65, purchased a $250,000, 10 year term policy at a cost of $3,200 per year. He faithfully paid the $3,200 each year knowing his wife, 27 years younger than himself, would be provided for if something happened to him. When this policyholder received the yearly billing statement for policy year 11 he was in “Shock and Awe” – the new yearly premium had skyrocketed to $11,000. He was informed that at age 80, the premium would be $20,000 per year and continually go up every year until age 89, when he would no longer be covered at all.

While meeting with him and his wife I explained what happens after the “initial” term period is up. He was clearly not happy and asked why the original agent didn’t tell him about this. Fortunately his policy provided a “guaranteed conversion option” to either a Whole Life or Universal Life policy regardless of his health (which had changed since he was 65).

He converted his term coverage to a permanent plan of protection (Universal Life in this case) and now has a level premium and guaranteed death benefit for life. His wife will now receive the insurance funds when needed.

While his Universal policy premium is $12,635 yearly it never increases! Had the original agent made this type of policy available to him at 65, his premiums would have been significantly lower than the $11,000 or $12,635.

This was certainly an expensive lesson to learn and clearly one that could have been avoided with proper guidance initially by the agent or follow up during those first 10 years to convert the policy before age 75.

Finally, please keep in mind: only 1 term policy out of 100 ever results in a paid death claim. Do you want a policy that provides if you die or when you die?