30-Year Term Policy: Why You Should Never Buy One
Whenever a financial advisor recommends a 30-year term policy to one of their clients, I just cringe. In my opinion, it’s almost always a poor decision. How many people will actually keep a 30-year-term for all 30 years? Very few. So why pay the increased premium versus a 10, 15, or 20-year term product?
This is especially true for successful people that have strong incomes now. Odds are those people will be making a lot more money in 10 or 15 years. Their life insurance needs will inevitably change, and they will replace or convert their term insurance policy. Think about your own career. Are you making more money now than you were 15 years ago?
You would be much better off buying a 10, 15, or 20-year term policy and saving some money. The best idea is a combination of permanent life insurance with a long-term care or chronic illness rider and a 10, 15, or 20-year term policy. Just read our previous piece on why you should own life insurance over the age of 60.
Before you buy a term policy, make sure you read the fine print regarding the term policy’s conversion options. You typically do not want to buy the lowest cost term product due to their poor term conversion options. You might be stuck with it.
What is a term conversion?
If you qualify for a super preferred term policy today, you have the option to convert that term policy to a permanent insurance policy without underwriting. For example, imagine that five years from now, you’re diagnosed with cancer. Your prognosis is good and you’ll likely survive, but you will never qualify for a super preferred underwriting class again. But if you already owned a super preferred term policy beforehand, you can convert some or all of the policy (with the same insurance company) to a permanent insurance policy at the same super preferred rates without any underwriting hassle.
Term Conversion Options Have Changed Dramatically in the Life Insurance Industry
In the past, if you bought a 20-year term policy, you had the ability to convert to any product (yes, any product) that the insurance carrier offered for the full 20 years (up to age 65 or 70).
Today, most of the lowest cost term products have really bad term conversion options. For example, you might be able to convert to any product for the first 7 years. From year 8 and on, you can only convert to a very expensive product. And what do I mean by expensive? How about 40% to 100% more expensive than the same insurance carrier’s best products. Some of the lowest cost term products in the industry only have one very expensive product to convert to from day one, and these products are typically 90% to 100% more expensive.
If you take the time to identify a competitively priced term product with good term conversion options, you will find that these products cost 1% to 9% more. Term rates are quite inexpensive now. For $1,000,000 in death benefit protection, it might only cost you $20 more per year to get a term product that allows you to convert to any product available by the insurance carrier for the full-term period, through age 70 or 75. Often the difference in cost is equivalent to you having one less Starbucks coffee per month. Ultimately, when it comes to life insurance, purchasing a 30-year term policy is almost always a poor decision.