Term Life Insurance And The Cost Of Waiting

A term that’s thrown around a lot with term life insurance is the ”Cost of Waiting”. What exactly does this mean and how is it important to your decision of when and how much to buy? Let’s take a look at how life insurance pricing works and the critical impact that age has on this process.

Term life insurance is different from other types of insurance such as health in that the rate you pay throughout the life of the policy is based on how old you were when first enrolled. This makes sense since the the statistical probability of triggering life benefits increases as we get older. Age at the time of enrollment can be the biggest determining factor in how much term life will cost you. The key point is to calculate the cost over the life of the policy. It’s best to look at an example to really understand how this works.

For example, if you are age 30 and planning to buy $500K for 20 years (let’s say for a newborn child), the average premium for a given carrier/plan is around $20/monthly. That’s $240 annually or $4800 over the 20 year term. Let’s say you want to wait till age 35 to purchase the same type of coverage. Now the average cost is $5760. That’s an increase of $1248 or a whopping 26%. On top of this, you did not have coverage for that 5 year year period and if something were to happen, you really lost $500,000 plus the $1248. The $500K is a little more important! This comparison is for two relatively young age bands. The difference in cost only increases as you get older. For example, the difference between a 35 and 40 year old would be $1440. This means you will have to either buy less coverage which may preclude you from taking advantage of price breaks that accompany certain dollar of coverage thresholds (such as $250, $500K) or you will have to buy it for a shorter period of time. You don’t want to have to buy 10 years of coverage now and another 10 years (assuming you qualify based on health) 10 years later because you will pay a significantly higher amount based on your older age then. Plus, you do not have the full coverage during that initial 10 year period of time in case something happens.

The take away from all this is that you want to buy as much as you can at the earliest age possible. You don’t want to buy too much and overextend yourself. It makes no sense to buy $2 million in coverage when you can really afford only(over the full term) $1 million. If you end up lapsing the coverage due to non-payment, that defeats the whole purpose of term life insurance. It’s better to find an amount within your budget and lock in the rate at the younger age. This is clearly a case where procrastination and waiting can you cost you real money!

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