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Top 10 life insurance buyer's tips

Posted In:  insurance

The cost of life insurance has dropped in a huge way over the last 20 years. Increased competition, and the power of the web bringing information straight to consumers, among other factors, have driven this dramatic change in costs.

Back in the 1990's a $500,000 guaranteed level term policy for a 50 year old, non smoking male would have been in the  $1800-$2000 range per year. And that's assuming a nonsmoker in good health, and an overall “preferred” risk. More recently, that same coverage, provided you are a non-smoker in good health, is closer to $900-$1200 per year.   In some cases, that's half of the cost, or even more if you factor in inflation.   We're talking a savings of around $16,000 for a 20-year term policy. 

Many different factors contributed to this drop in pricing.  Already mentioned were the increased competition among insurers, as well as better access to information for consumers.  Additionally, the insurance companies have driven a lot of the costs of doing business down. Everything from smarter marketing, increased use of technology and automation, and reductions of those required medical exams.  And of course, the biggest factor is that advances in medical science, safer automobiles, etc, have increased the overall health of Americans, which reduces risk for the insurance companies.

1. Check with your employer first, before going out to buy insurance on your own.

Many employers use the buying leverage of their total number of employees to negotiate life insurance rates that would be difficult to get on your own.   Aside from life insurance coverage for the employee, many companies also offer coverage for family members as well.   Typically, these types of policies don't require a medical exam, and the term coverage is available as some multiple of your current yearly salary.   Do be sure to check into the overall coverage amount and terms, as it's possible that they won't offer enough coverage.   In that case, the employer's plan could still be useful as a supplement to insurance that you obtain on your own. 

2. Leverage the power of the internet

There's more information available directly to consumers that ever before, and the internet is the main driver for that.  Use the opportunity to educate yourself on options.  A good place to start is this article entitled "What You Should Know About Buying Life Insurance" from the Federal Citizen Information Center, a service of the U.S. government.

Other good resources:

3.  Don't buy too much coverage ( or too little )

Figuring out how much coverage to buy for your life insurance is a complicated process.  According to the American Council of Life Insurers, the average coverage amount in 2007 was $175,514.  At first glance, that might seem like a lot of money, but it's actually woefully low for most people.  Once you consider the costs of a mortgage, college tuition, property taxes, and retirement for the surviving spouse, inflation, and other factors, you gain a better picture of the coverage needed.   A general rule of thumb used in the industry is five to seven time your current yearly salary.  But, that's just a rule of thumb.  Everyone's situation is a bit different, and deserves a bit of research.

Try this full-featured calculator or this simpler one for a rough idea of how much coverage you need, and then discuss the results with your agent.   No calculator is going to give you the right "magic number", as some of them are overly conservative or liberal, but they do produce a good starting point for discussion.

4. Buy a Term Life Policy, and avoid the Whole Life Policy

The basic difference between term and whole life insurance is that a term policy is life coverage only, and a whole life policy mixes in an investment.  With a term life policy, the death of the insured triggers a payout of the face amount on the policy to the beneficiary. Term life is available in different spans of time, with 20 to 30 years being the most common. Whole life insurance, on the other hand, combines a standard term policy with an investment. The investment is typically bonds, money-market instruments, stocks, or some combination of these three.

Because the whole life policy isn't insurance, it's always more expensive.  It's also combining two different thoughts, life insurance, and investment.   And, the investment portion is usually a "high margin" item for the insurance salesperson, so they may be incented to push hard for a sale.   The best advice is to separate the two concepts.  Buy life insurance from an insurance agent, and investments from an investment broker.   Then you know how much you are paying for each, and you gain the benefit of an expert in their respective field.   Avoid the whole life policy.  

5. Research the policy before you sign on the dotted line

There are a variety of inclusions, exclusions, discounts, and other forms of "fine print" within a life insurance policy, and it's important to know what you are about to purchase. Some common fine print items...

No payment for pre-existing diseases: Diseases that were in existence before the commencement of the policy are not covered.

 
6. After you buy, don't just forget about your policy.  Reassess every year.

There are a number of life events that could be cause to reassess the coverage and options of your life insurance policy.  Personal financial changes, such as an increase or decrease in your overall assets, expenses,or income are one set of factors to consider.  You may also consider other personal factors like a change in your overall health.  There are also outside factors like inflation to consider.  Try this calculator as a rough guide to evaluate your current coverage, and then consult your agent.

7. Get into good shape, and drop bad habits before you buy a policy

Many insurers offer discounts based on your good physical health.  Factors like smoking, your cholesterol level, high blood pressure and other factors, like depression, can drive up the cost of your policy.  It's also a good idea to get your weight under contol, as it's also a factor that's used to determine elegibility for discounts.

8. If you do have some borderline health issues, be sure to shop around.

There are some insurance companies, even A+ rated ones, that have more liberal cholesterol guidelines as compared to their competitors.  One of them allows up to a 240 total cholesterol level to qualify for their lowest preferred rate and a total cholesterol level of up to 270 for their second best “Preferred” rate.   The same holds true for blood pressure.  The generally agreed number that indicates high blood pressure is 140 over 90.  However, some insurers have a more liberal, higher number as their guideline. So...if you have a borderline number, it pays to shop around for the best discount. 

9. Leverage a professional if needed

Buying life insurance can be complicated, and there are many factors to consider in terms of coverage, discounts, and selection of an insurance provider.  A good insurance agent will have experience in understanding your financial situation, including your attitudes about risk, your income and estate tax “brackets,” and your other financial obligations.  They'll also have an eye for your personal situation including factors like your age, marital status, number of  dependents, and your overall health. 

They will then use this, along with their knowledge of the insurance industry, available policies, and discounts, to select the right coverage and policy for you.  It's not impossible to do this on your own, but there's always value in consulting a professional. 

10. Reconsider your profession or hobbies if they are considered hazardous.

Scuba diving, bungee jumping, and skydiving are examples of activities that will give a life insurance company the jitters. These and other hazardous activities may place you in a higher rate or health class, because they increase the likelihood of injury and/or death.  Additionally, some occupations also bring a higher risk, usually extreme examples like helicopter pilots or race-car drivers.   Lastly, if your job or leisure time means travel into extremely risky areas of the world, you may also be ineligible for discounts.

Generally, if your occupation or hobby carries an element of risk, you may not qualify for preferred rates, and you'll be placed in a higher rate class, regardless of your overall health.  This makes sense, of course, because the insurance companies are under a higher risk of having to pay out a policy benefit if you have a risky job or hobby. 

If you can't give up the hobby or change jobs, do be honest and disclose them.  You won't, of course, get the benefit of the discount, but you'll also be assured that the coverage won't be disputed if it's ever needed. 

 

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