Would it cause you to take a second look if you were to pass a life insurance agency and see a sign which read “rent to own” insurance?
This would be a sign you could expect to see on the marquee of a real estate or a property management office, but a life insurance agency?–a bit strange. If your curiosity were to get the best of you and you dropped in to check it out, you would find the sign to be very legit and the idea to be very appealing. Let me explain.
In our society there are events which require a monetary transaction to occur in order to maintain that society. We buy groceries, clothing, automobiles, houses, stocks, bonds, and a myriad of other purchases by exchanging a pecuniary object for the item we want to acquire. A value has been established for the item we are purchasing, and a value is given to the pecuniary object we are using to procure such item. If they are both of equal value we simply exchange one for the other; while if they are of unequal value, something else must be used to balance the exchange. Thus, the pecuniary object has a different value assigned to it, allowing for a combination of those values to equal the value of the anticipated purchase.
We sometimes don’t have the ability to meet the monetary value of the object we desire to acquire, so we make a down payment, with the rest being agreed upon to be paid over time. It is an obligation we agree to honor with the provider of the item; and with that trust agreement we are allowed to take the item and call it our own, even while we make the agreed upon payments over time.
Because we commit ourselves to the payment for those acquired things, there has to be a way of making these arrangements in our financial environment secure and believable. It used to be that a handshake was sufficient evidence to satisfy that arrangement. However, things are a bit more complicated in our day, so legal documents showing the debt along with the agreed upon terms of the transaction are common.
What if death complicates the transaction?
Then arises the issue of the debtor not being able to fulfill his agreement due to an untimely death. How does the holder of the debt receive the balance of the agreed upon debt? He could just take back the item sold and try to sell it again, he could just forgive the debt, or he could have made arrangements beforehand to have the debt secured to be paid by a third party.
Enter the concept of life insurance
For a small fee a third party agrees to cover the debt in the event the debtor cannot do so because of his demise. In order to keep things economically plausible, a life insurance plan reflecting just the actuarial possibilities of dying during the term of the contract is purchased. This is going to be referred to as a term life insurance policy.
In some ways it is a scientific calculation where you as the consumer agree to pay the premium with the hope you never have to use the benefit paid for, while the insurance company agrees to provide the benefit with the same hope they will never have to pay it out. If they don’t have to pay the benefit, it simply melts into the general funds of the company, helping it maintain its profitability. If they do have to pay, the death benefit comes from the general reserves established to cover that contingency.
What if you are about to outlive your term insurance coverage? What if you just get tired of paying a premium, feeling it is just a waste of money? What if you don’t want to lose the coverage afforded by the term policy? It is a bitter pill to swallow seeing you have paid all that premium and only have the cancelled checks to remind you of holding up your end of the bargain! Likewise, the insurance company doesn’t want you to terminate the relationship either; so when the policy was initially created, a guaranteed provision was included which would allow you to convert the policy at any time, regardless of insurability or occupation, to a permanent plan. Some may even have a special offer that part of the premiums paid can be applied to the newly converted policy.
This solution is so seamless and painless. It simply requires you sitting down with an agent to determine what type of permanent plan you want to purchase, filling out the required paperwork, submitting the newly adjusted premium, and surrendering the term policy.
When one considers that only about 2% of death benefits are paid from term life insurance policies (https://answers.yahoo.com/question/index), permanent plans make a lot of sense. Coupling the ability to use the cash reserves in a permanent plan to supplement retirement income from other sources gives even more credibility to solving the problem of outliving your term insurance policy by converting.