Every year (or every month or quarter or semiannually), you pay a set premium for term insurance, which covers you for that period. The next period, you pay again, either the same amount or a higher amount. Whether the amount is higher depends on whether you buy a one-year term, a five-year term, or another multiple-year policy. If you have a one-year term policy, you pay the one year and the company raises the premium each year. You don’t know how much you’ll pay next year.With a one-year term policy, you don’t know how much you’ll pay three or four years from now. Most companies can give you a pretty good estimate (provided that you select a company that has a proven track record of estimating accurately). But the key is whether the company provides dividends. If your premium is $346 per year and the dividend is $183, you pay just $163. If you buy a five-year term policy, the company declares the $183 dividend for all five years and you pay the same $163 each year. If you choose to renew for another five years, you pay the next premium minus the dividend rate for five more years.
With multiple-year policies like a five-year term, the company figures the premium based on the middle year. So if you’re 38 years old and buy a five-year term policy, the insurance company charges the same premium for all five years; it bases the premium on your age as though you were 41 for all five years (plus a slight, built-in inflation factor). If you add any options, the premium may go up slightly. On the other hand, if you choose a decreasing term policy, such as mortgage insurance, in which the death benefit decreases, your premium remains the same.
No comments:
Post a Comment