You may be like me in that you may want to throw something at the television set when the commercial touting a life insurance company‚Äôs ‚Äúrate lock guarantee‚ÄĚ appears on the screen.
Every life insurance company who issues either term insurance or whole life insurance guarantees the premium for the duration of the contract. What that means is that if you purchase a 20 year term life insurance policy when you are 45 and the premium is $45 per month for $150,000 of coverage, you will pay that same $45 per month when you are 64.
Similarly, if you purchase a whole life policy, the premiums are also guaranteed for the entirety of your life, provided you pay the called for premium when due. The only exception to this rule is universal life insurance, whose current premiums could go up.
There is even more bad news with these advertised policies. They are guaranteed issue policies and all applicants must be accepted for coverage. As a result, many persons who could not otherwise qualify for medically underwritten coverage will opt to purchase such policies. To protect themselves, most issuers of such coverage will not pay the full death benefit if the insured dies within the first two years of coverage. Rather, in the event of an early death, the insurance company will simply refund the premiums with some minimal interest. In so doing, the insurance company protects itself from what is known as ‚Äúadverse selection‚ÄĚ ‚Äď a phenomenon that inevitably occurs when uninsurable applicants apply for life insurance.
I ordered a kit from such a company and for an 80-year-old, $9.95 per month did not even generate a $1,000 death benefit. Of course, one could pay more than $9.95 per month and purchase more ‚Äúunits‚ÄĚ of coverage, but the price/benefit ratio is still horrendous.
Many of us are unaware of the underwriting process for life insurance. In a word, medical underwriting allows the life insurance company to assess your future mortality. The longer that you would be expected to live, the lower the premium you would be required to pay per unit of coverage.
For example, if I were a 70-year-old male and wanted to purchase $100,000 of term insurance for 10 years, I could pay only $1,614 annually if I were in the best of health, but $2,844 if I were in just average health. If I were medically impaired, I could still qualify for coverage, but the premium would be even higher.
The lesson to be learned that is that many persons who may have thought that they could not qualify for life insurance coverage actually could qualify and, thus, obtain coverage at a much more competitive price than that charged by the ‚Äúrate lock‚ÄĚ companies.
Another life insurance television ad claims that a certain company is ‚Äúthe only one that gives you all your money back.‚ÄĚ A pleasant looking fellow describes the company‚Äôs policy offering in terms that make it appear that the advertised company is the only company offering return of premium term insurance. Nothing could be further from the truth.
I studied return of premium term insurance when I was working on my MBA in the halcyon days of youth when I took a course in life insurance at the Wharton School. My professor, Dr. Dan McGill, was the author of the quintessential textbook ‚ÄúLife Insurance.‚ÄĚ
Term insurance premiums are priced to cover the probability that you will die before the policy period ends and to provide the issuing company some profit. A return of premium policy simply charges the policyholder an extra premium, which the insurance company invests over the life of the policy. At the end of the term period, there is enough cash accumulated from the extra premiums to precisely equal the sum of all the premiums you paid over time.
So, the lesson to be learned is that, before you believe advertising hype, it always makes good sense to do some careful research.