Term Life Insurance – What Are Guarantees?

Perhaps you have heard it said before that the only things in life that are guaranteed are death and taxes. With this fairly pessimistic view in mind, we thought it might be important to discuss a related issue: the guarantees involved with term life insurance.

First of all, what is term life insurance? This is the type of insurance that you purchase over a fixed period of time (ie, 30 years). It is often funded with an initial payment and then you make a series of payments over the life of the policy, which pays out in the event of your death to your designated heirs. At the end of the term of the policy, it expires (and you do not receive anything)-but it is often a very cost-effective way to provide coverage for your spouse, children, or even in some cases for a small business.

In Missouri, as in many states, term insurance is guaranteed by a “Guaranty Association” created by the state. This association includes all the insurers who are licensed to sell any type of insurance (including annuities, health insurance, and life insurance) by the state of Missouri; such agencies must prove their financial stability, ratings, etc prior to being approved, and are regulated by the state.

If an insurance company who is a member of this association is found to be “insolvent” – that is, unable to meet their obligations, as certain companies were in the wake of the financial turmoil of the past months-the association provides the protection up to the statutory limits to insure benefits are paid to the holders of the policy. Often, the other members of the guaranty association become involved in servicing the insolvent company’s policies and helping policy holders.

Like the government’s protection on assets held in FDIC insured banks, this provision is a “worst case scenario”. Insurance companies regulated by the state are periodically reviewed to ensure solvency, and most of the well-known firms, operating at a national level, are financially quite conservative. Nonetheless this measure of protection, the “guarantee” (not to be confused with certain guarantees that you pay for as part of a variable life or annuity policy) should provide purchasers of term insurance with a feeling of comfort.

Talk to your financial advisor about his/her recommendations for a good company through which to purchase your term life insurance policy, and keep in mind that other truism-what seems too good to be true, often is. But there are very cost-effective policies available from large, well-known and responsible companies-your advisor can help you determine the right fit for you.

Meghan McCartan, the author, works with Guido Aloisi at The Financial Solutions Group. For more information on life insurance options, click here.

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