A co-worker recently shared with me that her term life insurance policy is about to go through a major rate change in the none-too-distant future. In essence, if she stays with this company, it will go up by nearly ten-fold. When I heard this, I immediately thought, “no way could this be right.” I even suggested that she should be shopping around for a better rate. While I don’t think that shopping around will hurt, I am now wonder if this might end up being the best rate she can get for this type of insurance.
For myself, I have two life insurance policies. One I have with my job. The other is a whole life policy I purchased some years back, after speaking with a financial advisor.
If you don’t know much about whole versus term life, don’t feel bad. Most of us, myself included, don’t work in this field so, it’s not like we deal with these products regularly. So, here are some general definitions.
Term Life: As the name denotes, you are purchasing life insurance for a certain period of time or a “term”. For example, say you want to carry this insurance for a term of 20 years. This type of policy serves a very straightforward purpose. Using our 20-year example, if you should die within this time frame, the insurer would pay the agreed-upon benefit. You pay a fixed premium, typically monthly, for the entire term. There are no additional benefits associated with this type of insurance.
Whole Life: At least initially, this type of life insurance costs a little more. However, there are additional benefits outside of a payout upon death. This policy also accumulates value. So, you can borrow against it. Some even pay dividends. Furthermore, the premiums you pay will be the same for as long as you carry the coverage, be it 10 years or 50 years.
So, back to my co-worker. Over the past 10+ years, the monthly premium for her term insurance has been $12. She is now being told that it will rise to over $100/month. This is a pretty significant increase. However, after looking online, I am seeing that this is far from atypical. The basic point is that insurers are less likely to have to pay out life insurance benefits when you are younger but, as we age, there is a greater chance of a death benefit being paid, thus the higher premium.
It might truly be the case that this new rate would be a good one but, as I stated previously, shopping around won’t hurt.
In the end, we have to go with the life insurance we can afford and what is in the best interest of our (families’) needs. If the most affordable option for you is term life, you’ll probably need to go with it, as it might get you through important times in your life (for example, your kids’ college years). However, if you are in a better financial position, you might want to consider whole life. It might hedge you against an unexpected spike in premium costs. In either case, be insured.
Note: In this article, I did not explore the subject of another type of coverage, called Universal Life Insurance. If you are interested in or already carrying this type of insurance, you might want to be aware of some pending lawsuits involving sharp increases in premiums, even from those who believed that they’d already paid off the full cost of their policies.