Mike’s Life Insurance Advice

Hi Ben,

That’s a great question. And you’re absolutely right – term insurance is actually the most affordable way to purchase substantial death benefits.

If you’re wondering if the insurance companies use a different method to calculate the cost of insurance for term instead of permanent assurance you can relax because insurers actually use exactly the same mortality tables to calculate the cost of insurance as well as the death benefits.

And, as long as the premiums for either type of policy are current and the policy is in force when the policy holder passes away, all the death benefits are income tax free.

But there is are a number of reasons why term life insurance policies cost substantially less than permanent life policies.

One reason is that a term life insurance policy will provide you coverage for a limited period of time. Often the term of coverage is for 10, 15, 20, or 30 years. The premiums you will pay for any of these terms will remain the same for the duration of your coverage.

The actual cost is based on the total cost of every year’s annual renewable term rates with an adjustment made for the time value of money. Therefore, the longer the term of the policy, the higher the premium. That’s because as people get older it is more expensive to insure them. And all of this is averaged into the cost of the premium.

However, a term insurance program could very well expire without the insurance company having to pay out any claims. That’s primarily why they are so much lower in cost.

Studies done by the insurance industry show that this is a very attractive program for them to offer because there is a very low probability that death benefit claims are made for term insurance policies. One study showed that the probability of an insurance company paying a benefit is as low as one percent.

However, because permanent life insurance programs last for “a lifetime”, at some point in time the insurance company will absolutely have to pay out death benefits.

Hope that answered your question.

Mike