Term Life Bargain Days

Competition and the Net have cut rates--but that may not last

What costs less than half what it did two years ago? Term-life insurance. Term-insurance buyers have been enjoying some of the lowest rates in history thanks to increased competition and the ability to buy policies over the Internet or the phone without going through an agent.

Let's say you're a 45-year-old man in good health who wants a 20-year, $1 million term policy with level premiums. Back in 1997, that would have cost more than $1,800 a year, says Moody's Investors Service. Today, the annual premium can be as little as $964. But this bargain-hunter's paradise may not last. The National Association of Insurance Commissioners has approved regulations that would require insurers to raise the reserves they set aside to cover claims. Several states have already approved the regulations, and most are expected to follow suit by Jan. 1. To finance the reserve additions, insurers likely will jack up premiums and limit rate guarantees. So it's smart to move now if you're considering buying.

Term-life policies provide insurance for a set period--5, 10, even 50 years--without the savings and investment features you'll find in whole- or universal-life coverage. Unlike other types of life insurance, you can drop coverage without penalty. And thanks to toll-free calling and the Net, you have plenty of choices. If you want to review options with a live person, you can visit an agent or broker, though you'll pay a commission to buy. If you feel confident about shopping solo, direct sales over the phone or Net are the cheapest routes. You might also check out deals through your college or credit-card issuer.

Read the fine print, though. Not all bottom-rate policies deliver on their promise--and while some rock-solid insurers do offer bargain rates, the cheapest rates may come from those that are less financially stable. Moreover, the lowest rates may be available only to a select group of fit-as-a-fiddle folks.

Insurance-quote services and mutual-fund companies such as Fidelity Investments can help you evaluate your options and needs with online calculators. That said, nothing is as easy as it sounds. Different underwriting criteria mean that a 10-year term policy for a 40-year-old male nonsmoker seeking $1 million in coverage might cost $810 a year with Midland Life Insurance or $675 at Banner Life Insurance. Some quote services ask a handful of queries, while others have detailed questionnaires that ask, for example, whether you've been convicted of driving under the influence in the past 10 years or used tobacco in the last five. Ultimately, what you pay depends on a mandatory physical exam and lifestyle factors. If you're a passionate scuba diver, don't expect to receive the lowest rate. A hazardous hobby might double your premium or keep you from getting coverage.

Figuring how much insurance you need is easier than estimating rates. The rule of thumb is to insure yourself for 5 to 10 times your annual income. But what you need will also depend on your spouse's income, the number of your dependents, and your own wealth. Once you figure out how much coverage is right, evaluate the type of policy you need. Be sure to check out multiyear level-premium insurance. A relatively new product, it guarantees you'll pay the same premium for the life of your policy. Last year, some 40% of new term policies guaranteed a set rate for 20 years or longer, compared with none in 1995, according to Moody's.

Multiyear term policies are becoming the coverage of choice. Locking in a flat rate eliminating age-based hikes and future health screenings is a key benefit for aging boomers. Buying a level-premium policy now will also protect you if rates rise or your health declines. But that rate stability will cost you: A 10-year, $1 million level-term policy for a 38-year-old female nonsmoker in fine health may cost around $500 annually. A 20-year policy would cost $740. Always check the fine print to see if your level premiums are guaranteed. An insurer may be able to hike rates for an entire class of policyholders. And some 10-year policies might guarantee rates for only 5. Your rates could jump after that if you have a medical problem.

You should also shop for convertibility, which lets you switch your term policy for more expensive whole- or universal-life coverage without another health exam. Insist on a policy that doesn't restrict the conversion period to the first few years of the term. Whole life stays in effect until age 100; universal lets you designate how much of your premium should go toward insurance and how much for investments.

MORE FOR LESS. Second-to-die insurance is worth considering, too. A second-to-die policy on a husband and wife doesn't pay off until both have passed on. Second-to-die term insurance provides cash to pay taxes on your estate and protect your children or other heirs. Since premiums are based on two life expectancies, they are typically cheaper than those on policies covering one person.

Your choice of beneficiary is critical. Most people select a spouse. But if you opt for a child, things can get tricky if the child is a minor when you die. In that case, you'll want to name a trustee to accept the insurance payout and administer it until the child turns 18. As a policy owner, you'll need to pick a payoff method as well. The common options are interest income only, installments for a fixed period, or an annuity.

Always check an insurer's financial stability. Buy from companies with the highest ratings from Standard & Poor's, A.M. Best, Duff & Phelps, Moody's, or Weiss Group. Once you hold a policy, check the insurer's rating with at least two agencies annually. Your bargain-priced policy will be little consolation if your insurer won't be around to make the payout if you die.

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