You want to look at three things when evaluating your choices for term life insurance policies.
First, the duration or the ‘term’. Term life insurance has premiums that are level for a specified and predetermined timeframe – so a 10 year term has premiums level for 10 years; 20 year term has premiums that are level for 20 years, etc. You should select a term that matches closely how long you expect to need life insurance for. If you’re 30 years old and looking to insure your income through to retirement then a 30 year term or term to age 65 would be appropriate.
Secondly you want to look at the options or riders. There’s three that are commonplace, but you want to ensure that they are embedded (these three are generally included at no charge).
- Renewable – Renewable polices are still inforce (though at a much higher premium) after the initial term. This is important as it gives you a safety net at the end of the term – you can keep the policy for a while instead of it ending abruptly. A non-renewable term policy coverage ends abruptly at the end of the term.
- Convertible – convertible policies let you exchange the term coverage to a permanent life insurance policy (generally a whole life insurance policy), without medical questions. You should only accept a term policy that has conversion. If you become uninsurable, this option gives you the ability to get life insurance forever, without a medical exam. It’s also commonly used to get a small whole life policy at retirement – simply convert your term to whole life then reduce the coverage amount down to a smaller number like $25K – easy whole life policy with no medical exam.
- Exchange option – similar to the convertible option, the exchange option lets you exchange your term policy to a longer term policy (from term 10 to term 20, or term 20 to term 30). This option lets you purchase a shorter term policy, at cheaper rates initially, then extend it later by switching to a longer term. Again, no medical exam is required.
Lastly, you should look at the history of the company’s conversion option. When/if you convert from term to whole life insurance (and this is common, as people often want a small whole life policy when they retire) your choices will be whatever the company is offering at that point in the future. Yes, that means that the future choice of insurance to convert to is not guaranteed – not the policy nor the premiums, but it is often assumed that companies that have traditionally had good whole life policies will continue to offer them in the future.
This has become prominent in the last decade. Some companies have exited the whole life/permanent life insurance marketplace. This leaves them without a policy for their clients to convert to. These companies have simply taken their last revision of their whole life/permanent policy, increased the premiums substantially, and offered that as their offering for clients looking to convert. Because the policies are not available in the open market, the premiums are horribly uncompetitive – as much as twice what other companies are offering.