Term Life Insurance Gets a Boost

One major drawback to traditional term life insurance is that life is messy.

Short of a functional crystal ball, we have no way of knowing exactly what our insurance needs will be 10 or 20 years down the road when our term policy expires. By then, we're basically left with three options: buy a new (read: affordable) term policy if we're healthy, extend it on an annual basis at exorbitantly higher rates if we're not or walk away from it.

But consumers now have a more flexible choice in term-style insurance with the introduction of Term UL, a new hybrid product that grafts term life coverage onto a universal life, or UL, chassis.

One major advantage of the Term UL framework is that it allows you to extend the term of the policy on a level-premium basis after you are in the plan, although that level premium will be based on your age at the time you extend the policy. This provides the planning flexibility that term insurance traditionally lacks and can be a financial benefit should your health decline to the point that you become uninsurable down the road.

"It gives the policy owner much more flexibility than they get with term," says Janet Deskins, senior vice president of life products for Genworth Financial, which introduced its Colony Term UL in late 2009. "With term, you basically have three choices, whereas with this product, you have eight to 10 different options depending on your financial situation at the time. The flexibility that a UL product gives you is really critical."

Colony Term UL raised eyebrows when it was introduced because it offered more features at a price that beats many garden-variety term products. Other insurers, notably West Coast Life and Lincoln Financial Group, also offer Term UL products.

Deskins says the pricing reflects a recent tightening of reserve requirements within the insurance industry. By creating a term product with the reserve requirements of a universal life policy, Genworth saved enough to price Term UL competitively with term life, which has dropped considerably in recent years.

Ed Hinerman, broker and president of the Hinerman Group in Colorado, estimates that a Term UL policy might cost about the same in the long run as converting a term policy to a universal policy. But the transition may prove easier with a guaranteed growth path included in the original contract.

"There is a propensity for companies, when they want to keep more money in-house, they will go to a conversion product that is only guaranteed for, say, 10 years," Hinerman says. "That's just a slap in the face to a consumer because conversion it always touted and sold as, you can convert your policy to a permanent policy without evidence of insurability. This will eliminate that, because (conversion) will already be in there contractually."

Hinerman likes what he sees in the early Term UL line. He says it may even be the future of term. "I think it's a solid product. I would buy it for myself," he says.

That said, he has identified one potential drawback for policyholders who may be forced by circumstances to lower the face amount of their coverage. Under a standard universal life policy, your insurance agent will typically lower your coverage amount and adjust your premium accordingly for free, while Term UL would exact a surrender fee on the reduced amount.

Glenn Daily, a fee-only insurance consultant based in New York, says Term UL may provide an added benefit for those who want to keep their options open: "It may generate a cash value so you can do a 1035 exchange to either a fixed or variable annuity," he says. "But if there's a huge surrender charge, then that's not going to be practical."

Deskins says Genworth is already tinkering with the terms of its surrender fee. "We're trying to get that right so the person doesn't become so locked in that they can't decrease the policy," she says.

Until the dust settles, Hinerman suggests this work around: "An agent should ask, 'Do you anticipate possibly wanting to lower the face amount in the future? If so, let's do two policies, not one. That way you can just dump one policy and there is no surrender charge,'" he says. There is no extra cost to carry two Term UL policies, he says.

So who is a perfect fit for the new Term UL product?

"We've seen sales all across the board, from young people who need something a little bit more expensive going in, all the way up to people in their 60s," says Deskins. "It really comes down to their insurance needs. Anybody who has a temporary period to cover, but they know they want a permanent product that has flexibility on the tail end, it's going to fit for them."