The Rising Appeal (and Falling Cost) of Term Insurance

When it comes to life's priorities, protecting one's family falls in the priceless category. And because of increased competition, the actual price for term life insurance has dropped by half in a decade. For $40 or so a month - about the cost of a cup of coffee a day - a healthy 40-year-old male can buy a policy that will pay $500,000 if he dies within 20 years.

And cheaper means more popular. Term policies accounted for 22 percent of the $11.8 billion in total premiums paid by individuals in 2003, up from 13 percent in 1993, according to the Life Insurance Marketing and Research Association. But those figures do not capture the new dominance of term insurance because term premiums are much lower than those for other types of life insurance.

The drop in term premiums, fueled in part by consumers' ability to comparison shop online, is spurring increased demand among new customers as well as policy holders jumping at the chance to switch to less expensive policies. Five years ago, Joseph Frawley Jr., a retired police sergeant in Cambridge, Mass., bought a 20-year policy with a $1 million death benefit that cost $550 a month. That high premium reflected a bout with melanoma and a history of cancer in his family.

"It was an onerous cost," said Mr. Frawley, who now operates his own corporate security firm, Eastern Security Inc.

Mr. Frawley, 52, recently got a new 20-year, $1 million policy for $330 a month.

Term insurance is the most basic form of life insurance. It provides coverage for a fixed period; if the policyholder dies in that time, the beneficiary collects the benefit. At term's end, the policy has no value. By contrast, with far more costly universal life and whole life policies, the beneficiary receives the payout whenever the policyholder dies. Such policies include an investing component, known as the cash value.

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J. Robert Hunter, director of insurance at the Consumer Federation of America, said term was the logical choice for most people, once they understand its sole purpose.

"Life insurance is a bad name," he said. "It should be called insurance to protect against the economic consequences of premature death. If that goal is made clear, then all you need is a sufficient amount of coverage for a specific period of time."

Mr. Hunter had term policies with a combined death benefit of $2 million while he was raising his six children. Now that they are grown, Mr. Hunter, 68, no longer has life insurance.

Unlike universal or whole life policies, which remain difficult to decipher, it is easy to compare prices when shopping for term insurance. Web sites like Insurance.com, Insure.com, AccuQuote.com and Term4Sale.com provide price quotations from a basket of insurers. Or, an independent agent or fee-only insurance adviser can do the shopping for you.

An insurer will use your personal data to determine your risk profile, much the way a mortgage lender uses your credit rating. Though each insurer has its own system, there are generally three broad categories: standard, preferred and preferred plus (for the lowest-risk, healthiest policyholders).

As insurers look for ways to bolster the bottom line, some are tightening qualifications for the least-expensive categories.

"The price you are first quoted is not the same as the price you may end up qualifying for," said David Mendels, who runs Creative Financial Concepts, a financial planning firm in New York. Between that initial quotation and a final offer, your medical records will be scoured. If you want a death benefit of $500,000 or more, the insurer is likely to require a blood sample. The higher the benefit - and your age - the likelier the insurer will demand a full medical exam.

"Even superhero marathon runners may have a hard time qualifying for the best rates," said James Van Elsen, a consulting actuary in Pella, Iowa, who advises insurers. He said that while 30 percent of an insurer's pool might have previously qualified for the best rates, he believed that as few as about 10 percent might make the cut today.

Byron J. Udell, chief executive of AccuQuote, said that anyone who was bumped down from preferred plus to preferred could face a 25 percent premium increase. A standard policy can be at least double the rate of preferred plus.

Ten years ago, for example, a 40-year-old man, 6 feet tall and weighing 230 pounds, might have qualified for the best rate. Today, however, a 40-year-old man would need to weigh no more than 200 pounds or so to get the lowest premium. Insurers are also looking more closely at cholesterol readings. A decade ago, a count of no more than 240 with a cholesterol-to-L.D.L. ratio of 6.5 or lower could snag the best rate. Now you often need a count of no more than 205 and a ratio of 4.5 or less. L.D.L., or low-density lipoprotein, is the kind of cholesterol associated with heart disease.

Genetics can be important, too. The health histories of your siblings, as well as those of your parents, are now part of the analysis. The onset of a serious disease in a family member is enough to boot you out of contention for the best rate.

Your performance behind the wheel is another factor. Some insurers now charge a higher premium if you have more than one moving violation.

"Knowing which companies are tighter or more lenient on certain issues is the key to ultimately getting the best policy," Mr. Udell said. "Not all underwriters have the same rules, and it's impossible for a consumer to know what those guidelines are."

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Buying the right amount of insurance, of course, is also important. David Barkhausen, a fee-only life insurance adviser in Lake Bluff, Ill., says people tend to underestimate their family's financial needs and buy too little insurance. A conservative approach, he said, is to buy enough insurance to allow the beneficiary to live off the interest income from the death benefit, and not have to touch the principal. For example, if you assume an annual return of 5 percent, you should buy insurance equal to 20 times the annual income you want to replace.

"But if you have built up other assets, you can use a smaller insurance amount," Mr. Barkhausen said.

Another factor is the length of time your beneficiaries will need that income. Do you have toddlers and want to provide for their education costs through graduate school? Or are your children finished with school?

Glenn Daily, a fee-only insurance consultant in New York, recommends that his clients spend $149 for the ESPlanner software (esplanner.com), which produces a personal financial analysis.

The goal, experts say, should be to have the insurance in place until you have other assets - pensions, Social Security, retirement funds - that can cover your expenses.

A NEW strain of term insurance, called return of premium, is getting mixed reviews. The pitch is that if you are still alive at the end of the term you will be repaid all your premiums. But those premiums can be more than 30 percent costlier than a standard policy, and you don't get the money back until the end of the policy - and you get nothing if you let the policy lapse.

Mr. Udell at AccuQuote.com says such policies can make sense for someone who doesn't like the idea of paying for insurance and getting nothing in return. "With basic term insurance you only get paid if you die; this allows you to get something back if you in fact survive the policy." But, he added, you must consider carefully whether you could do better investing the difference in premiums on your own, and whether you have the resolve to keep paying the premium for the entire term.

Some critics dismiss these policies as marketing ploys. "I'm just skeptical of anything where I have to tie up my money for that long a period," Mr. Daily said. Joseph M. Belth, professor emeritus of insurance at Indiana University and editor of The Insurance Forum, a newsletter, said: "It's a gimmick. You don't buy insurance to get money back. You buy insurance to protect your family."

Source: nytimes.com - 08-29-2004

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