Terms Of Insurance Unendearing ‘Levelized’ Premiums Could Backfire If Health Deteriorates
Anyone who finds shopping for life insurance confusing - in other words, “everyone” who shops for life insurance - has an additional wrinkle to contend with these days.
In recent months, insurance companies and agents have been muttering that some popular types of coverage may be about to become more costly, implying that now is the time to buy and beat the price hike.
Is it so? Well yes. And no. (This is insurance we’re talking here, remember.) Some policies “could” become more expensive, “if” they are the type known as level-premium term life, and “if” states adopt some recently proposed model regulations for insurance-company reserves, and “if” insurance companies choose to pass the costs of those changes on to consumers.
Let’s start at the beginning:
There are basically two types of life insurance: term and cash-value. Term is the simpler and, therefore, less expensive kind: In exchange for your yearly premium, the insurance company agrees to pay your beneficiaries if you die. The younger and healthier you are, the smaller the chance you’ll die this year; therefore, the less you’ll pay in premiums. As you get older, the premiums will rise.
Most people, particularly those with young families, want term life insurance. (Many agents, however, much prefer to sell more expensive cash-value insurance, which earn them far more in commissions.) But what worries experts most about term insurance is the certainty that it will cost more in the future.
Insurance companies, therefore, came up in recent years with what’s called “levelized-” or “guaranteedpremium” term policies. They cost a little more up front, but the company agrees not to raise the yearly premium for some time - often 5, 10 or 15 years. Usually the price jumps after that, and the company may also require another medical exam so it can decide whether to continue coverage.
As a rule, long-term guaranteedpremium policies have been a good deal for consumers, according to Paul Bracaglia, director of personal financial planning for Price Waterhouse in Philadelphia. “Almost exclusively, when we look for term, we’re looking for a 10-year (guarantee) period,” Bracaglia said. “You don’t want surprises down the road.” So for that period, there are no surprises.
Some insurance companies, however, may have gone too far trying to please the customer. At least that’s the opinion of the National Association of Insurance Commissioners (NAIC), the trade group of state regulators that provides the closest thing to national oversight of the U.S. insurance industry.
Fearing that the insurers were taking on more risk than they might be able to handle, the NAIC last month adopted a plan that would force many companies to increase their reserves when they sell term policies with premium guarantees of more than five years. It’s essentially just an accounting change, but one that would shrink many companies’ bottom line unless they raise premiums for such policies.
“If the reserve requirements are raised, the rates will have to be raised,” said Alyse Blumberg, a broker of term policies for Transamerica and other large insurers.
But many in the industry say consumers should take any warnings about higher prices to come with at least a grain of salt.
“The competition in this business is brutal,” said Milton Brown, whose Massachusetts service finds low-cost term policies for consumers for a fee. So many companies offer termlife insurance, he said, that prices for identical policies already can vary by as much as 300 percent.
Price should be a consideration for anyone in the market for life insurance, industry observers say - but consumers shouldn’t be swayed by warnings of imminent rate hikes.
Take your time, shop around, and ask questions until you’re comfortable that you understand everything in a life-insurance policy. If you’re buying term insurance, look at how long the company will guarantee a given premium rate, and also at any so-called “re-entry” provisions, which determine whether and how often the company can re-examine your health and other factors.
Jim Hunt, an actuary with the Consumer Federation of America’s insurance group, says some policies that allow for yearly increases in premium - called “annualrenewable” in the industry - may in fact be cheaper in the long run, since they don’t require re-qualification.
Buying a policy with a long levelpremium guarantee could mean problems when the guarantee runs out, if your health has declined and you still need insurance, he said.