GF591 Unit 8 Two Term Life Policies Compared Example

Premium Goes Last: A Unit 8 Comparison of Two 20-Year Term Policies for a Facilities Engineer

[Student Name]

Purdue University Global

GF591: Individual Insurance Planning

Unit 8 Policy Comparison

[Instructor Name]

[Date]

The household, the two offers, their provisions and premiums are composite and illustrative; the sources cited are real.

The Need

The earlier needs calculation found that the household would need about $393,043 if he died, after counting her income, the children's survivor benefits and existing assets. Rounded to a standard face amount, the new policy is $400,000 for twenty years, until his youngest child is past college and he is 66. His group life insurance of $248,000 is excluded from resources because it ends if he leaves the university, and coverage that disappears with a job change is not a plan.

The Two Offers

Policy A costs $890 a year, guaranteed level for all twenty years.

Policy B costs $740 a year, guaranteed for ten years. After that, the contract allows the insurer to raise the premium up to a stated maximum of $2,160 a year.

Provisions Compared, in Order of Consequence

1. Premium guarantee. A: level for twenty years. B: level for ten, then up to $2,160. Stronger: A, because it fixes the full cost of the need.

2. Conversion window. A: convertible to permanent coverage without medical evidence until age 65 or the end of year eighteen, whichever comes first. B: convertible only during the first ten years. Stronger: A, since a health change late in the term would leave B's owner with no route to permanent coverage.

3. Conversion products. A: any permanent product the insurer sells at conversion. B: one designated universal life product. Stronger: A.

4. Waiver of premium. A: waives premiums if he cannot perform his own occupation for the first two years of disability, then any occupation. B: any-occupation test from the start. Stronger: A.

5. Accelerated death benefit. Both allow an advance of part of the face amount on a terminal diagnosis with twelve months or less to live. A allows up to 50 percent, B up to 25 percent. Stronger: A.

6. Insurer financial strength. A's insurer is rated A+ and B's A by the same rating agency. Stronger: A, narrowly.

7. Contestable and suicide periods. Both two years. No difference.

8. Grace period. Both 31 days. No difference.

9. Reinstatement. A: within three years with evidence of insurability. B: within two years. Stronger: A.

10. Policy fee. Both include a $60 annual fee in the quoted premium. No difference.

11. Return of premium. Neither. No difference.

On every provision where the contracts differ, Policy A is stronger, so the only argument for B is its price, and its price is guaranteed only for the half of the term that matters least.

Why Conversion Ranks Second

Conversion rights are easy to overlook because most term policies are never converted. But the right is valuable to exactly the people whose health has changed, since they could not buy new coverage at standard rates. Research on lapse and conversion behavior shows that the policyholders who keep or convert coverage tend to be those whose health has worsened, which is why insurers limit the right in cheaper policies (Gottlieb & Smetters, 2021). For a 46-year-old, a diagnosis in his fifties is plausible, and A's longer window preserves his options.

The Cost Page

Total premiums over twenty years:

1. Policy A: $17,800, guaranteed.

2. Policy B, best case: $14,800, if the insurer never raises the rate.

3. Policy B, worst case: $29,000, if the rate rises to its maximum in year eleven.

B saves $1,500 over the first ten years. It loses to A once its later premium averages more than $1,040 a year. The worst case costs $11,200 more than A.

Price differences between term policies are common even for similar risks, and per-dollar prices for term coverage tend to decline as policies get larger (Cawley & Philipson, 1999). A $150 gap is small next to the risk B's open-ended premium creates.

What the Premium Gap Buys

Put another way, the extra $150 a year for Policy A buys three things: certainty about the cost in years eleven through twenty, a conversion right that lasts eight years longer, and a waiver of premium that pays if he cannot work as an engineer even if he could do some other job. If his health declined in his fifties, any one of these could be worth far more than the $3,000 of extra premium A costs over twenty years compared with B's best case. The comparison therefore treats the gap as the price of protection inside the contract, not as waste.

Recommendation

Choose Policy A. It is stronger on every provision that differs, and its cost is fixed for the full need. The one condition that would reverse the choice is a firm plan to drop the coverage before year eleven, for example if the mortgage would be paid off and the children through college by then. That is not this household's situation: the younger child will be in college in years seven through eleven, and the need remains through most of the term (Black et al., 2015).

Next Step

Apply for Policy A and keep the group coverage in place until the new policy is issued, so there is no gap.

References

Black, K., Jr., Skipper, H. D., & Black, K., III. (2015). Life insurance (15th ed.). Lucretian.

Cawley, J., & Philipson, T. (1999). An empirical examination of information barriers to trade in insurance. American Economic Review, 89(4), 827-846. https://doi.org/10.1257/aer.89.4.827

Gottlieb, D., & Smetters, K. (2021). Lapse-based insurance. American Economic Review, 111(8), 2377-2416. https://doi.org/10.1257/aer.20160868