Three Options If Your Term Life Insurance is Expiring
ADAM J. PECHIN, CPA, MST
A term life insurance policy can be a powerful, cost-effective tool for helping your family meet its financial obligations in the event something happens to you or your spouse. But what happens when the term ends? Here is what you need to know to maintain peace of mind.
Coming to a Crossroads
It is common for young couples to buy 20-year (or longer) term life policies when their children are young or they have purchased a home. The idea is that, when a policy reaches the end of its term, children will be financially independent, the mortgage will be largely paid off and the policyholders will have accumulated enough savings.
But that does not always turn out to be the case. Children may remain dependent on you well into their 20s, mortgage payments can continue indefinitely (especially if you have refinanced) and retirement savings may fall short of expectations.
Beyond the Initial Term
If you anticipate that you will need life insurance protection beyond your policy’s initial term, you can take one of several actions:
- Renew the Existing Policy
This may be the best option if you have health problems, because many policies allow you to renew without being required to answer health-related questions or undergo a medical exam. However, depending on your age, premiums may increase, especially at the conclusion of a specified level term period.
- Purchase a New Term Life Policy
If you are in reasonably good health, you may want to purchase a new term life insurance policy. Recent developments in the insurance industry have led to generally lower prices and innovative new products, such as policies that combine life insurance and long-term-care benefits. Some policies offer “living benefits,” which allow you to accelerate death benefits in the event of a terminal illness. To obtain a new policy, you will need to answer health questions and submit to a medical exam. Premiums will likely be higher than those of your initial policy. However, it may be possible to keep costs down by selecting a shorter term, such as five or ten versus twenty years. Another option: If you need coverage for only a few years and can afford sharp price increases, purchase a policy that is renewable annually.
- Switch to Permanent Life Insurance
If your future financial obligations are uncertain, or you wish to use life insurance to provide a source of wealth for your children or other loved ones, consider permanent life insurance. Whole life, universal life and variable life policies are much more expensive than term life policies, but they provide a death benefit typically for the rest of your life. They also include an investment component that allows you to build cash value on a tax-advantaged basis. Many term life policies allow you to convert to permanent life insurance without a medical exam. And to hold costs down, you may be able to convert your term policy to a permanent policy with lower death benefits.
If you are considering converting to permanent life insurance, review your term life policy as soon as possible. Most policies set a deadline for converting, which may be several years before the term expires.
Covering All the Bases
What if you are a young adult who wants to purchase life insurance but does not want to have to extend coverage at high prices decades from now? Permanent life insurance would solve the problem, of course. But the premiums may not fit your current budget.
You might consider purchasing a term life policy with a longer-term (such as 30 years). Or, you might buy a 20-year term policy with the largest death benefit you can afford, and then supplement it with a 30-year term policy with a smaller death benefit. Ask your insurance agent about this and other cost-effective strategies for protecting your family.
The Difference between Investing and Speculating
CHRIS GEORGIOU, CPA, MACC, MST
Last year, the Harris Poll conducted a survey about investing for the American Institute of Certified Public Accountants (AICPA) — with sobering results. Almost half of the survey’s respondents (48%) said they believed that “a volatile market gives them an easy opportunity to make a profit.” In addition, 28% who said they are involved in household investment decisions perform no investment research, and the majority (63%) of those who perform research do it quarterly or less frequently.
These findings suggest that many Americans could use a refresher course in the difference between investing and speculating. A warning about the threat that the latter poses to an investor’s wealth is also needed.
Benjamin Graham, known as the “father of value investing,” described the difference between investing and speculating this way:
An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.
No investment truly promises safety of principal. There is always some risk involved. But investing strategies — including diversification, proper asset allocation and thorough research on specific companies, securities and sectors — advocated by Graham and other investing experts historically have been effective in reducing risk. It is also important to consider your risk tolerance and time horizon in determining the aggressiveness of your investments. A longer-term view substantially mitigates risk, even for more volatile investments such as stocks.
Speculation, on the other hand, often is based on market timing, hunches, tips and other strategies (including luck). Proponents attempt to earn significant profits based on short-term price swings. But the risk of loss is so high that speculation generally does not have a place in a financial plan focused on long-term wealth creation. There is substantial evidence that even professional investors, such as fund managers, generally lose money when they try to speculate.
Not Necessarily Bad
Speculation is not always a bad idea. So long as most of your wealth is invested prudently, dedicating a small portion of funds to speculative activities may be acceptable. But you should understand the risk and be prepared for the possibility that you could lose some or all of your investment. In other words, do not speculate with money you need. Talk to your advisor about the most appropriate investments given your situation.