Tuesday, March 18, 2008

Who buys cheap term life insurance? The well-to-do!

If you’re considering buying term life insurance, you’re in good company. Level-premium term buyers tend to be more mature, better educated and better-heeled than the average life insurance buyer.

By Mary Pollman – SelectQuote

It’s counterintuitive. Term insurance is the least expensive form of life insurance. You would assume that would mean its buyers were, on average, younger and poorer. The product is simpler than permanent life insurance policies. So you might think that meant buyers would be less sophisticated.

You would be wrong.

For almost 20 years, I worked for life insurance companies that sold low-cost level-premium term life insurance. And for those 20 years, the profile of the average buyer didn’t change much. He (the ratio of male to female buyers was 60-40) was not who you might think. He was not in his 20s or 30s, not in his first job, or first house or having his first kids.

The average age was around 42. Our clients’ children were usually high school age. The term coverage was often purchased to make sure the kids could afford to go to college, no matter what. Or it was there to secure the bigger, fancier roof over this upwardly mobile family’s head. Or the term policy was there to cover the entrepreneurial bets of our successful client.

Compared to the buyers of my company’s permanent life insurance policies, our term buyers were more likely to be business owners, professionals or managers. They were better educated, made more money and had a higher net worth.

Why should this be so? Why would people who can afford to spend more pay less than the average person on life insurance?

I suppose there are dozens of reasons. For one thing, these folks usually had more financial savvy. They could make up their own mind about life insurance – sometimes contrary to the advice they’d get from their neighborhood insurance agent. The commissions on term don’t give most agents a lot of incentive to recommend it.

The term buyer often has a clearer picture of his or her financial future. Term typically is purchased for 10, 15, 20 or 30 years. The buyer has to be able to imagine what his life is going to be like up ahead and what the risks will be. What is the likelihood that the kids will actually graduate in a normal time period, will actually move out of the house when they’re expected to, that the business will grow according to plan, that your partner will really want to buy you out? This simple product poses some important and sometimes complicated questions.

There is a sizeable group of term buyers who have bought into the buy-term-and-invest-the-difference philosophy. Instead of paying a big chunk of a life insurance premium into a cash-value side fund, their plan is to just buy the coverage – i.e., buy a term policy – and see if they can earn more than the insurance company would have paid on the cash value. In most economies, they would probably win that bet, if they have the discipline to actually make the investment. (I wouldn’t put a wager on my following through, but our term buyers were the kind of folks who would probably have more discipline than I do.)

It’s also possible that well-heeled, well-educated term buyers simply have more imaginative plans for their money. They want to sock away as little of it as possible in necessary but – let’s face it – pedestrian stuff like life insurance.

About the author. Mary Pollman, CLU, has been writing about life insurance, long-term care insurance and annuities for more than 20 years. She has contributed to insurance publications, websites, consumer product literature and agent training. Mary held senior management positions in communications and marketing with two life insurance companies. She is an editorial advisor to SelectQuote.

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