Term Insurance Designs

There are, of course, other forms of term insurance that add features to the two basic types after-tax and pre-tax life insurance.

For example, you will find policies referred to as 5-, 10-,20-, or even 30-year term policies. These designs attempt to avoid the objection people have to the annual increase in the cost of term insurance.

The insurance company adds up the number of term premiums that will be required on the policy in total, divides by the number of years for which a level premium is guaranteed, discounts for the time value of the money using the interest rates available at the time, and charges the resulting level premiums rather than the actual yearly renewable term rate. In this, you can see the evolution toward level premium life insurance. In effect, the insurance companies charge more in the beginning so that they don't have to charge such a high amount at the end.

Yearly renewable term insurance normally is the most efficient way to provide for life insurance needs when maximum protection is desired with the minimum current outlay of cash. We can level the cost of term insurance through the use of mortgage term insurance. With mortgage insurance, coverage is taken away (i.e., the amount of life insurance is reduced) and the same amount is charged each year for a smaller amount of life insurance, as the policy owner gets older. Thus, the cost per $1000 of coverage does increase with age, but the premium stays the same because there is less coverage.

Watch out for the various level term premium policies. They may be what are called brick wall policies. At the end of the level premium period, the substantial increase in cost to continue the policy may put you up against a brick wall of cost. You will have lost control. The policy will terminate before you do, and everything you paid into it becomes past history.