by Guest » Fri Sep 30, 2011 10:20 am
Could anyone please let me know about decreasing term life insurance? I would like to buy a life insurance policy and can’t decide what type to buy and want to know about decreasing term. Please explain!
Posted: Wed Nov 30, 2011 04:26 pm Post Subject:
I have never seen a situation when decreasing term made sense.
And if the tree falls in the forest but you aren't there to see it, does that mean it makes no sound?
even in the first year, the decreasing term insurance might be more expensive
In the words of the immortal Molly of radio days, "'Taint so, McGee."
From the same insurance company (we have to be discussing apples-to-apples here), the product designs of level term and decreasing term cannot possibly result in a level term policy premium (for the same initial face amount of insurance) that is more expensive than decreasing term.
The simple reason is that the combination of increasing mortality risk and declining death benefit protection in a decreasing term policy is a counterbalancing proposition that does not require as much money to cover the risk over time. In a level term policy, the mortality risk is constantly increasing, but the death benefit protection is not declining. Therefore the amount of money required to cover the death benefit in the face of increasing mortality is much higher. It cannot work any other way.
Can you take a level term policy at a high initial face amount and periodically reduce the face amount over time? Of course. But if you do all the math, even that proposition will fail to result in a solution that is less expensive (in terms of total cumulative premiums paid) than the lower (and level) premium decreasing term policy over time.
And there is one other consideration to your plan to reduce the face amount of the level term policy over time. Each reduction in face amount may create an opportunity for the insurance company to actually increase the cost of insurance (a) up to the maximum guaranteed rate, or (b) simply base the continuing premium on the attained age of the insured at each policy "alteration".
Why? Because the contract was written and issued with the insurance company's expectation that the full premium would be paid over the term of the contract. To alter that in a way that gains an advantage over the insurance company violates their "rules of the game". And it definitely is their game. They won't let you violate the rules if it means they will lose the game.
Having said all this, I don't believe most people are well-served with decreasing term either. Not that it doesn't make sense, as you have never seen, but that it leaves most people with a huge protection shortfall, for the reasons I posted previously.
It does make sense. But only from one perspective -- to provide the precise amount of protection needed for a particular purpose.
From a different perspective, it absolutely makes no sense when it leaves a spouse and children with no money to live on after the mortgage is paid off.
That's your perspective, and there's nothing incorrect about that. A larger level term policy will provide a better solution for the larger total need.
But it's not the only perspective. That's the only thing wrong with your failure to have "seen" . . . it's a form of tunnel vision.
=======
Now, here's a thought (apology, if you prefer) concerning a different thread. Just because I had never seen a disability policy that worked the way you indicated, doesn't mean it did not exist. You showed me a policy that's some different than the ones I've dealt with in the past. So my comments were incorrect to that extent. And not all disability policies are like the one you sent me -- not all of us work in the "white collar" market. Many DI policies are not noncancellable, and many do have the features/provisions I mentioned in that other thread (group DI policies, with which I have the most experience, certainly do -- at least here in California, and the one that covered folks -- mostly executives for an oil company in Texas -- I was responsible for in a former agency setting). So tunnel vision can affect us all.
[ If you can recall which thread that was, you can copy this and post it there for me. ]
Posted: Wed Nov 30, 2011 08:11 pm Post Subject:
And if the tree falls in the forest but you aren't there to see it, does that mean it makes no sound?
No. But if it is a very small forest and I'm in it everyday adn don't see any down trees, there is a good chance that it didn't fall. In other words, if I haven't seen a situation (other than guaranteed issue for someone with health issues) where decreasing term insurance makes the most sense, there is a good chance that it almost never makes sense.
From the same insurance company (we have to be discussing apples-to-apples here), the product designs of level term and decreasing term cannot possibly result in a level term policy premium (for the same initial face amount of insurance) that is more expensive than decreasing term.
Why do we need the caveat of the same insurance company? That isn't how we sell insurance. If a client is looking for insurance and can't decide between 10 year and 20 year term, I am not comparing Company ABC's 10 year term to Company ABC’s 20 year term. I am comparing the best 10 year term to the best 20 year term for the client and it will probably be from different companies.
The insurance company, like all companies, are in business to generate the most profit. I have seen insurance companies who charged more for 5 year term than for 10 year term. I have seen companies who had a cheaper price for ART than for 10 year term for all years. It doesn’t have to make logical sense.
Why does Company ABC charge $300 for their term instead of $400? Probably because they can make more money charging $300 than $400. It’s a competitive business. It is easy for a consumer to go on line and compare the prices of level term products.
Why is the cost per thousand of decreasing term so much more than level term? Most likely, it is due to the lack of competition and transparency. Competition brings down the cost of products. The lack of competition allows prices to stay higher. The competition in the level term marketplace simply doesn’t exist in the decreasing term marketplace.
Posted: Wed Nov 30, 2011 08:14 pm Post Subject:
The simple reason is that the combination of increasing mortality risk and declining death benefit protection in a decreasing term policy is a counterbalancing proposition that does not require as much money to cover the risk over time. In a level term policy, the mortality risk is constantly increasing, but the death benefit protection is not declining. Therefore the amount of money required to cover the death benefit in the face of increasing mortality is much higher. It cannot work any other way.
You are 100% correct that they don't have to charge as much money because of this. However, like I said, the lack of competition in this area allows them to charge much more on a cost per thousand.
So, although they could charge less, they don't.
Posted: Wed Nov 30, 2011 08:18 pm Post Subject:
And there is one other consideration to your plan to reduce the face amount of the level term policy over time. Each reduction in face amount may create an opportunity for the insurance company to actually increase the cost of insurance (a) up to the maximum guaranteed rate, or (b) simply base the continuing premium on the attained age of the insured at each policy "alteration".
What matters isn't what an insurance can do. What matters is what they actually do. Regardless, this problem is solved by using more than one policy.
Posted: Wed Nov 30, 2011 08:22 pm Post Subject:
That's your perspective, and there's nothing incorrect about that. A larger level term policy will provide a better solution for the larger total need.
But it's not the only perspective. That's the only thing wrong with your failure to have "seen" . . . it's a form of tunnel vision.
Forget the larger perspective. Look at this only in terms of covering the mortgage. I still have yet to see a situation for a healthy person in which this can be done less expensively with a decreasing term product.
Logically, it should be cheaper with a decreasing term product. However, when one looks at the pricing, it simply isn't the case.
I would love if you can show me an example with real pricing where a decreasing term product will cost less total dollars for the insured.
Posted: Wed Nov 30, 2011 08:51 pm Post Subject:
If you want to admit that you were wrong and unfamiliar with white collar disability policies, here is the thread:
ampminsure.org/feedback/about17200.html
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