Term Life Insurance - One Longterm Policy or Renew & Reduce Cover Later?

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Fromage
Posts: 5
Joined: Wed May 17, 2017 4:20 am

Term Life Insurance - One Longterm Policy or Renew & Reduce Cover Later?

Post by Fromage » Thu Aug 03, 2017 9:12 am

I’d appreciate people’s thoughts on buying term life insurance – best to go for a 25-year plan, or a 15-year plan followed by e.g. a 10-year plan with reduced cover? I’ve read differing opinions here and did some homework to try to figure it out. It seems that the former option works out better, but keen to know if I’m missing something!

I’ve been offered the following policies:

25 years: $1697 / year for $1 million coverage (Lifetime total: $42432)
15 years: $1066 / year for $1 million coverage (Lifetime total: $16002)

I also asked the insurer to price me at my age +15 years for a 10 year policy @ $500,000 coverage. This worked out at $1812 / year – at today’s prices. But adjusting that for 3% inflation, that would rise to around $2823 / year in fifteen years time, bringing the total lifetime cost of the two policies to $44,432 ($16002 + ($2823 * 10)).

I.e. even reducing the cover, you spend $2000 more over the lifetime of the two policies and you lose $500,000 coverage for a 10-year period.

Surely it therefore makes sense to lock in the policy now while I’m young – 34 – rather than renew again in fifteen years? Or have I missed something here?

Also – do the above quotes seem reasonable? They are the cheaper of two different insurers, both longstanding. I’m an expat living in the UAE, first child on the way, so keen to get this sorted!

Thanks in advance for all advice!

pochax
Posts: 1269
Joined: Tue Oct 21, 2008 11:40 am

Re: Term Life Insurance - One Longterm Policy or Renew & Reduce Cover Later?

Post by pochax » Thu Aug 03, 2017 9:19 am

what coverage are you aiming for? $1M now and $500k in 15 years?

i did 2 staggered 20-yr policies (both $1M each): so i have $2M coverage right now and in 12 yrs or so, i will lose $1M of it and the other policy will have a few years left (at $1M). i got it through USAA and it costs me ~$1300/year total for both policies and i first purchased at age 38. do you have health issues that would raise your premium/risk? if not, you should shop around more (check out term4sale.com or insure.com)

ResearchMed
Posts: 5486
Joined: Fri Dec 26, 2008 11:25 pm

Re: Term Life Insurance - One Longterm Policy or Renew & Reduce Cover Later?

Post by ResearchMed » Thu Aug 03, 2017 9:36 am

Do some sort of laddered set of term policies, all starting in the near future.
Figure what your family's needs might be "now into the future" and also "now to future plus x years", etc.
Work the policies together, so that one of the policies drops off when the needs are less (those years that have passed don't need to be covered by insurance anymore).

Don't plan on being able (e.g., healthy enough) to purchase a new term policy in 10 or 15 years.
If you aren't healthy enough, then chances are you'll be wishing even more that you had it.

RM
This signature is a placebo. You are in the control group.

Fromage
Posts: 5
Joined: Wed May 17, 2017 4:20 am

Re: Term Life Insurance - One Longterm Policy or Renew & Reduce Cover Later?

Post by Fromage » Thu Aug 03, 2017 10:18 am

Thanks pochax and ResearchMed - much appreciated.

No, no underlying health issues. The high cost of the premiums is probably because I am based in the UAE, where cost of living often makes up for no taxes! Not sure whether I'd be eligible for overseas policies, but I will check it out.

Just to clarify with both your suggestions regarding laddering policies - you'd recommend buying a number of policies now, each with different terms? E.g. 1 x 25 years, 1 x 15 years, 1 x 10 years, correct? I can see that would be a sensible approach; e.g buying $500,000 for 25 years, and $1m for 15 years. Fortunately, we have some reasonably good savings, family property, my wife works etc. so my main concern is paying the kids education and leaving some cash for my wife to reestablish herself if I die.

ResearchMed
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Joined: Fri Dec 26, 2008 11:25 pm

Re: Term Life Insurance - One Longterm Policy or Renew & Reduce Cover Later?

Post by ResearchMed » Thu Aug 03, 2017 10:24 am

Fromage wrote:Thanks pochax and ResearchMed - much appreciated.

No, no underlying health issues. The high cost of the premiums is probably because I am based in the UAE, where cost of living often makes up for no taxes! Not sure whether I'd be eligible for overseas policies, but I will check it out.

Just to clarify with both your suggestions regarding laddering policies - you'd recommend buying a number of policies now, each with different terms? E.g. 1 x 25 years, 1 x 15 years, 1 x 10 years, correct? I can see that would be a sensible approach; e.g buying $500,000 for 25 years, and $1m for 15 years. Fortunately, we have some reasonably good savings, family property, my wife works etc. so my main concern is paying the kids education and leaving some cash for my wife to reestablish herself if I die.
Yes, you've got the right idea about the ladder.
As time goes on, the "total amount" needed to support dependents goes down, if for no other reason than "fewer years remaining".
But it might also be that "child care" isn't needed after a few years, etc.

The "health issues" is a concern for *later*... when you were considering that you might add another policy when the first term ran out.
No matter how healthy you are now, you can't be certain about 10 or 15 years from now that you would be insurable at a reasonable rate... or at all...

RM
This signature is a placebo. You are in the control group.

Fromage
Posts: 5
Joined: Wed May 17, 2017 4:20 am

Re: Term Life Insurance - One Longterm Policy or Renew & Reduce Cover Later?

Post by Fromage » Thu Aug 03, 2017 10:31 am

Thanks ResearchMed. Take your point re. health issues. On a number of other threads I'd understood the point about reducing coverage, and assumed that entailed buying another policy further down the line, which when I stacked up the numbers didn't seem to make a whole lot of sense. But the idea of laddering the policies hadn't struck me. Perfectly clear now! Thank you.

KT785
Posts: 79
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Re: Term Life Insurance - One Longterm Policy or Renew & Reduce Cover Later?

Post by KT785 » Thu Aug 03, 2017 1:45 pm

I recently went through this exercise myself and opted for a single large policy for 30 years (I'm 29 and we're planning on starting a family in the next year).

I previously considered laddering multiple policies of various lengths and coverage amounts, but ultimately preferred to have the option of keeping the full amount of coverage for the entire term if needed (bearing in mind that needs may differ from plans and inflation impacts the purchasing power of the face amount).

My life insurance carrier, as I'd assume many do, allow for you to reduce the coverage at a later date . . . the number of times you can do so may be limited, but it's something to be aware of as an alternative to the laddering approach frequently suggested on Bogleheads.

In my review, laddering policies didn't save much, if any, on premiums during the initial period as compared with one policy on which you reduce coverage later.

For the sake of information, I have a medical issue that may impact rates/insurability later in life so I didn't want to risk of going through underwriting again if I could avoid it.

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