Life insurance is always a very touchy subject, some feel it’s not needed while others argue that it is an important part of your financial plan. Often people are unsure how life insurance fits in their finances, everyone has unique needs and there is no “one product fit all” policy. One of the main reason people avoid life insurance is the cost associated with it, but insurance does not always have to cost you an arm and a leg, here are six tips that can help you reduce the cost of life insurance.
1. Get the right type of life insurance. Life insurance has three attributes; the death benefit, the premium, and a time period over which you’re going to pay the premiums. If you die with $500,000 of life insurance type A or with $500,000 of life insurance type B, they are both going to pay $500,000. In other words, it doesn’t matter what type of insurance you have, they’re all going to pay the same death benefit if you have the same insured amount. And that should highlight that what you need to focus on is the premiums and the time period (assuming you’ve properly established how much life insurance you do need). If you need insurance for a period of time, buy the insurance product which best matches that duration. If you need insurance for a period, look to term insurance, which will be less expensive over the short term. If you intend to keep the insurance forever then look into permanent insurance (i.e. Term to 100) which will be less expensive over the long term (though with higher premiums initially). Note: If you need some term and some permanent, look into a layer cake type of policy where you have one layer of permanent insurance with a topping or second layer of term insurance.
2. Shop around. Brokers don’t noticeably impact rates. If you get a policy from an insurance company with Broker A or Broker B, you’ll get the same rates. Brokers don’t have a secret pipeline to getting you better rates. So the key? Find a broker that shops out more companies. That’s how a broker will benefit you – the more companies they shop, the better the likelihood that you’ll be getting cheaper rates because they’ve shopped a more competitive company.
3. Make sure your term policy has ‘conversion to permanent’ as a policy provision. This won’t save you money upfront but if you own a term policy and become uninsurable or highly rated then the ability to convert to permanent insurance (i.e. Swap your term for a permanent policy) with no medical exam and still get healthy rates could save you a bundle in the long term. The conversion privilege is basically insurance for being able to buy permanent insurance and it’s free with many companies – so go with a company that has it.
4. Pay annually if you can. Monthly premiums are easier to put into a budget for most people, however paying annually can save you almost one month’s premium every year. It’s hard to get that rate of return at the bank!
5. Don’t mix investments and insurance. Corollary A: Make sure all your policies are guaranteed from every aspect. If you’re investing inside a policy or have non-guaranteed provisions then you potentially place your entire policy at risk. And remember that with some non-guaranteed aspects, “0” return or no return is not the full potential downside. Minus 40% return might be the downside. Don’t add risk when you’re trying to manage it.
6. Take your medical exam first thing in the morning. If you are able, don’t have anything to eat or drink prior to the medical exam. This ensures that the underwriter doesn’t have to determine if the indicators in your blood test are the cheerios you had for breakfast or some weird sugar related issue you have all the time. Your blood pressure should also be lower in the morning. All combined that can help get you the lowest insurance premiums possible.
Glenn Cooke is a life insurance broker and president of InsureCan.
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{ 10 comments… read them below or add one }
Another big way to save on life insurance premiums is through lifestyle choices, particularly maintaining a healthy weight, not smoking, & avoiding dangerous hobbies (mountain climbing, horseback riding, etc).
One other thing to consider: term life only pays if you die, but whole life typically has both a death benefit AND a cash value. In other words, while the premium on whole life insurance is higher, you can also borrow against the policy value, and sometime obtain cash distributions over time. Not conclusive, but certainly another factor to weigh.
most of the time, you do not have to shop around because salesmen are always around the corner trying to peddle you any type of insurance dreamed up. It is also so hard to get something that suits your needs so i just prefer going without life insurance
Splitcents; your emphasized AND is incorrect. It’s death benefit OR cash value; not both. And emphasizing cash value as a reason to buy insurance has been disproven many times, beaten right to death. That’s why I made that my point #1 – buy the type you need depending on how long you need the insurance for, not for distractions like a cash value. Buy life insurance basing your decision on secondary distractions, you run the risk of being sold the wrong (more expensive) type of insurance.
As for borrowing against the cash value, that’s pretty 1980′s. Back then we saw a period where interest rates were 18% but many old whole life policies had provisions where you could get a loan for like 4%. Presto chango, yank all the money out of your policy at 4% take it to the bank and get 18% interest. That went well for a bit. But quite frankly the arbitrage opportunities in whole life policies are long gone. If you’re looking for a place to save money in case you need a loan in the future then the word you’re looking for is ‘TFSA‘.
@Glenn Cooke: fair point, my ‘AND’ was technically incorrect. What I meant to say was that with whole life, you can get a cash value even if you don’t die (if you cancel the contract and surrender the policy)… I wasn’t alluding to anything so fancy, just suggesting that some policies actually have value as assets independent of a death benefit. Perhaps this is not true anymore–you are the expert here.
It seemed that your assertion that policies only had three attributes (duration, premium, death benefit) presupposed the inferiority of whole life insurance. I don’t think I disagree with you. But for me at least, the difference between asset and non-asset is a material.
Again, you are the expert, and I completely see your point: such things are almost certainly more distracting than helpful in most cases.
[quote]It seemed that your assertion that policies only had three attributes (duration, premium, death benefit) presupposed the inferiority of whole life insurance..[/quote]
Nope, though these days whole life is in fact almost always inferior to other available options. The idea is to focus on how long you need the insurance for, not other secondary policy options. (I note you’re in the US. We have two other ‘whole life’ type insurance products in Canada, only one of which became available in the US just this year.)
I wasn’t getting to get specific in a brief article, but the cash value is in fact part of the death benefit. The cash value is used to reduce the net amount at risk (the part of the death benefit that is actually insurance), which means premiums can then be level.
My concern with cash values – and the reason for my somewhat ascerbic response
is less of a technical one and more of a marketing one. When the insurance industry starts to focus on cash values as a benefit or feature, it’s usually to the exclusion of other more sensible alternatives. And then the consumer ends up with a permanent product instead of a term product, even if they should have a term policy.
So it’s not permanent is better, or term is better. If you need insurance forever, permanent is better. If you need insurance for a shorter period than ‘forever’ then term is better – despite any other assets or tax advantages inherent in a permanent policy.
You have two choices, a volvo or a dump truck. If you’re commuting, a volvo is better. If you’re hauling gravel, then the dump truck is better. Even if I wow you with the fact that the volvo has air conditioning and is really really safe, if you buy the volvo to haul gravel, you’re doing the wrong thing
. Buy based on your primary need, not the air conditioning.
Battling with uncertainties is the most common reason for acquiring life insurance. Well,s it generally prepares us for times that we may just want to establish financial benefits. Handling your most concerns must be the best feature you need to look into a policy. Sure that there are lots of available plans all over but you need to choose the one that will be greatly beneficial to you considering a lot of factors for which premiums and terms are at most. After all, it must be worth even the cents that we will be entrusting on to them.
These are excellent tips! Shopping around truly does help, but instead of shopping with brokers, your readers might benefit more from shopping online on life insurance agency websites. These websites deal with hundreds of life insurance carriers (as opposed to just a handful by a local agent). They are connected in real time to life insurance carriers and are able to find policies based on their latest underwriting guidelines. Therefore, the quotes shoppers receive will also be quite accurate.
Pretty insightfull post. Never thought that it was this simple after all. I have spent a good deal of my time searching for someone to clarify this matter clearly and you抮e the only person that ever did that. I really appreciate it! Keep up the great posts!
Term is good for lots of coverage cheaply when you are young. Like renting you have to start somewhere.
If you believe taxes will be higher or the same in the future then with the right type of insurance you can have more money in retirement, better protection and take on less risk.
Since term insurance is often sold as a “needs” product and not as “wants” product and not as a part of a complete financial plan which covers three areas.
Protection
Savings
Growth
The car you drive is that the cheapest car, or the car you want to drive? The house the cheapest or what you want. Once a plan has been set up, term insurance like renting, is a place you don’t want to stay forever.
When you say shop around, I wanted to point out that consumers should also check with their existing employers to determine if they are offered a group life insurance policy. Perhaps the HR representative didn’t offer it to them during the “new hire” period or the company started offering a plan after the employee had already been working there a number of years and it simply fell through the cracks.