Managing the policy conditions of a “Term” life policy would seem to be relatively straight forward. The Term is the number of years the policy is inforce with a level premium. It can be 10, 15, 20, or 30 years. So during those years as long as the premium is paid on time, or within the 30 day grace period, the coverage should remain inforce.
But there are policy conditions that are noteworthy:
1) The significant jump in premium if coverage is needed beyond the term period. As a for instance, a $5m policy on a 35 year old, for 20 years could only be $3,175 per year. But if the insured develops health history over those 20 years, the premium in the 21st year of the 20 year term policy jumps to $82,575 (that is not a typo). Significant focus should be given to the policy term so that coverage remains in force beyond the considered term of years.
2) The 30 day grace period for Term life policies is very rigid. If that period is missed fresh medical history “may” allow for reinstatement, but recognize that insurers are more inclined to re-underwrite at the older age and charge a higher premium.
3) Term Life policies come with a guaranteed conversion to permanent life coverage. The guarantee can be for a limited numbers of years or it can be a conversion right to the last day of the policy. Generally, the longest guarantee comes with a higher annual premium.
4) Implementing a term policy >$1m, the insurer should be highly rated and large in assets. If >$5m you should consider using 2 companies in hedging the future.
Term Life policies, with their low premium per $1m provides significant leverage at death against financial responsibility. However, examining policy conditions as part of underwriting will eliminate some potential unwanted surprises.
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