This post is was originally published on Financial Mentor
13 Little-Known Life Insurance Buying Tips That Save You Money
- Reveals life insurance company sales tricks, and how to protect yourself.
- Warning! Your best deal won’t come from a simple price comparison. There’s one more thing to know…
- 7 key factors to accurately calculate how much life insurance you need so you don’t overpay.
- 13 bonus tips to save you money
Life insurance should be a simple, straightforward financial decision.
Unfortunately, the insurance companies love to make it complicated so they can increase their profits at your expense.
The key to a smart decision is to ground yourself in the correct principles from the beginning so you don’t get led astray.
In a nutshell, you want to buy only:
- The amount of life insurance coverage you need,
- To insure only those risks you can’t afford to accept,
- For the minimum time required,
- From a reputable firm,
- At the best price possible.
I’ll show you exactly how to accomplish these five objectives by following these 4 key principles:
- Don’t get confused by the salesman’s pitch. Focus on the one thing that matters – insuring your life. That means not getting distracted by complicated insurance products with bells and whistles. If it’s complicated, then it’s probably the wrong choice.
- For that reason, don’t buy life insurance as an investment or as a retirement planning vehicle (except in extremely rare situations explained elsewhere in this smart consumer’s guide).
- Instead, buy life insurance to protect your dependents from lost income if you die. Leaving your family indigent is a risk you can’t afford to accept, so transfer that risk through life insurance.
- The way you accomplish this is by buying life insurance from an experienced, independent agent because there’s more to getting the best deal than just getting a cheap quote online. An experienced, independent agent costs you nothing and knows how to qualify you for the best rate class resulting in the overall lowest price.
That’s it! As I said, it’s a simple decision when you know what to do and have proper guidance.
But many life insurance salespeople don’t want you to hear that.
Instead, they want to up-sell you on the many features and benefits of their complex investment alternatives. These sales tactics are intended to confuse you into overpaying, buying features you don’t need, or buying the wrong type of life insurance altogether. In fact, research shows that if you already own life insurance, there’s a 2/3 chance you’re paying too much!
This smart consumer’s guide will arm you with all the knowledge you need to make a smart decision. I’ll also give you some uncommon savings tips that most agents won’t tell you, so you know how to get the best deal possible.
Get This Article Sent to Your Inbox as a PDF…
The Life Insurance Company Has An Unfair Advantage
The starting point to making a smart decision is to first understand life insurance sales from the other side of the transaction.
That’s because life insurance is an unfair game where the insurance company holds all the cards.
- They have teams of actuaries armed with reams of research based on mountains of data identifying risks and costs with great precision. It’s their profession to know exactly how to price risk so they profit. You have none of that knowledge.
- They have marketing experts who research all the latest consumer hot buttons and carefully craft features and benefits into their policies to motivate you to part with your money. It’s their profession to know the psychological triggers that get a person to buy, not yours. You have none of that knowledge.
- They have teams of lawyers who carefully craft the terms and conditions of those fancy policies with carve-outs and special exceptions to limit payouts. You probably wouldn’t recognize the relevant issues buried in the legalese even if you read every single word of the policy. Again, they have the knowledge advantage there as well.
In short, life insurance companies aren’t dumb.
They know how to define and price risks in ways you’ll never understand, and they’re in business to maximize their profits, not yours. This is not a conspiracy theory, and there’s nothing unethical about it. It’s just smart business.
However, you need to be an equally smart consumer by carefully defining the role life insurance will play in your financial plan so you buy on your terms, not theirs. That’s the key to how you get a great deal.
For the overwhelming majority of buyers that means buying life insurance focused on the death benefit (without bells and whistles) because it’s a competitively priced commodity product allowing you to compare apples to apples and make a smart consumer decision. It provides the essential risk management function you need in your financial plan at a fair price. It’s the level playing field you want to operate on.
Conversely, the playing field you want to avoid is complex life insurance policies filled with multiple riders, special terms, or contractual investment and retirement planning benefits that attempt to differentiate the product from the competition. That game gives the insurance company the advantage because each product is specialized, making it nearly impossible for the consumer to compare and price accurately.
The key point is there’s nothing inherently wrong with life insurance as a financial product. It’s been around longer than you and I, and it will be around long after we pass because it serves an important, legitimate consumer need. It’s an indispensable financial tool for the right situation (explained below…).
However, you must be a smart consumer and educate yourself to buy it right so you don’t get tricked by the sales tactics.
3 Rules For Buying Life Insurance
Life insurance bought right is an expense – not an investment. That’s because the smart way to buy life insurance is for risk management, not investment return.
Always remember that all forms of insurance, including life insurance, are negative expectancy bets (pays less to the average consumer than it costs net of investment opportunity cost).
Again, this is not a conspiracy theory. It’s inherent in the nature of all insurance businesses. The insurance company must take in more value from consumers than they pay in benefits so they have enough money left over to pay the salespeople, company overhead, and leave a profit for investors.
The consumer, on average, loses with all forms of insurance.
But that doesn’t make life insurance bad. Quite the opposite is true.
Life insurance provides an essential risk transfer function in your financial plan. You want to insure away those risks that would cause losses you can’t afford to accept. If your family relies on your income and would face financial difficulty should you unexpectedly die, then properly purchased life insurance is the best solution to managing that risk.
Yes, it’s a negative expectancy bet, but when you’re that exception who dies during the policy period, then life insurance will be the single best “investment” you ever made with a payoff that dwarfs anything else you could do with your money. The value of the death benefit will provide a lasting gift that your family will always thank you for, making it an essential purchase in the right situation.
So the fact that it’s a losing bet (on average) for most buyers doesn’t mean you don’t buy life insurance. Instead, it means you buy it the smart way with these four clear objectives in mind:
- Purchase it only for the valid financial purpose of transferring risk you can’t afford to take. (i.e. don’t buy it for investment or other reasons except in extremely rare special situations as described in other articles here.)
- Buy the minimum amount you need.
- Buy it for the minimum time required until you accumulate sufficient assets to self-insure, or until you no longer have dependents that need the benefit.
- Hope that you flush 100% of your premium money down the toilet because that means you lived a long, healthy life and never needed the risk transfer… and that’s a good thing.
In other words, life insurance bought right is no different than buying any other type of insurance. It’s protection from disaster because it’s irresponsible to burden your family with unmanaged risk. You hope it’s a complete waste of money because it sucks to die early.
If that confuses you then it’s only because you’re confusing life insurance with investing (which makes unethical life insurance sales people very happy). Life insurance bought right is not an investment. Instead, you want to pay the company a fee to accept a risk. The company pools that risk and earns a fair business profit for the service.
That’s the smart, cost-efficient way to buy life insurance.
What Type Of Life Insurance Policy Should I Buy?
There are two types of life insurance:
- The simple type of life insurance that satisfies the valid risk transfer function described above.
- The complex type of life insurance where companies exploit their unfair advantages described earlier to create product differentiation designed to confuse the consumer so they can suck money from your pocket into theirs.
The sad truth is the life insurance marketing game has morphed from a simple risk transfer sale into a complex puzzle where savvy companies design complex investment and retirement products under a life insurance wrapper with carve outs and riders that consumers have difficulty understanding or pricing correctly. These riders provide a complex array of benefits designed to hook consumer hot buttons motivating a buying decision that, more often than not, is not appropriate.
The absurdity of mixing insurance with investing should be intuitively obvious:
- You don’t buy health insurance as a profitable investment, do you? Of course not! You buy it to transfer the risk of huge health care bills if you get sick or injured.
- You don’t buy fire insurance on your house as an investment, do you? It’s a risk management tool in the event your house burns to the ground so you can rebuild it without going bankrupt.
- The same is true with auto insurance, disability insurance, and every other type of insurance you can imagine. They’re all risk management tools in your financial plan.
So why is life insurance the one exception that’s sold as an investment?
Answer: It isn’t.
You would laugh at your auto insurance or health care insurance company if they tried to double your premiums by tacking on some sort of contractual investment product with complicated pay off terms. It’s not why you buy those insurance products. It wouldn’t make any sense.
Think of life insurance the same way and you’ll make a smart decision.
Let’s get more specific with examples…
The Right Reason To Get Life Insurance
The starting point of the discussion is to decide if you need life insurance at all.
According to LIMRA’s Insurance Barometer, the top 3 reasons people buy life insurance are:
- To cover burial and other final expenses
- To replace lost income
- To pay off the mortgage
As stated earlier, if you don’t have sufficient assets to allow your family or business to pay their bills in your absence, then you need life insurance. Simple enough.
Yet, here are some disturbing statistics…
- Half of Americans say they would be adversely affected by the death of their family’s primary breadwinner in 1 year or less. (Source: LIMRA Study)
- 40% of households with an annual income of $100,000 or more also report they would feel significant impact within 6 months of the primary breadwinner’s passing.
- Combine this with the fact that the majority of Americans (54%) say it’s unlikely they’ll purchase life insurance in the next 12 months (according to a study by LIMRA) and there’s an obvious problem.
A large segment of the population has a legitimate financial need for life insurance. Their dependents or business would suffer due to lost income or services if they died. They need financial protection in the form of a death benefit. But they don’t have life insurance.
Why does this happen?
Nobody wakes up in the morning contemplating their unexpected death. Nobody wants to spend money on an insurance product they hope never pays off. Basically, the whole life insurance topic isn’t fun. The result is the blissful pursuit of avoidance through one of the following three flawed rationalizations:
- The most common reason people fail to buy life insurance is because they’re oblivious to their need and never really think it through. (That probably doesn’t apply to you since you’re reading this article.)
- The second reason is you falsely believe “it can’t happen to me”. That’s obviously nonsense since people die without warning every day so it’s totally possible that it just might happen to you. Improbable, yes. Possible? Absolutely!
- You confuse probability with expectancy. In other words, the probability of you dying prematurely is crazy small, but that doesn’t matter. Expectancy should drive all your financial decisions (not probability) and expectancy is probability multiplied by payoff. When payoffs are unacceptably large and negative, then the smart decision is to transfer those risks through insurance (despite the low odds of occurrence). It’s just smart financial risk management and it’s the reason you should use insurance products in your financial plan.
If the above describes you in any way (where you have legitimate need but haven’t taken action yet), then this link will get you a free quote and introduce you to an experienced, independent agent that honors the rules in this article and will help you make a smart decision.
The Wrong Reason To Purchase Life Insurance
Unfortunately, most life insurance is sold, not bought.
The reason is simple. Life insurance has limited market appeal when you only sell a death benefit. As stated earlier, nobody want to contemplate their death or spend more money. It requires a serious conversation about the risk of dying prematurely and leaving your family behind. Nobody wants to think about that. It’s not an easy sell.
That’s why life insurance companies prefer to wrap a bunch of other benefits into the product so it has more sex appeal as an investment (read my expose on whole life insurance here). It’s clever marketing to dress the death benefit up in investment clothing creating product differentiation and expanding market share into the investment industry to increase total sales and profit. It’s good business on their part, but it’s not good for your wallet.
Always remember it’s not called “investment insurance” or “retirement insurance” for a reason. It’s called “life insurance” because its proper function is to insure your life.
Don’t fall prey to those sales tactics.
Buy Term Life Insurance Online – The Best Value
What do life jackets, seat belts, umbrellas, and life boats have in common?
When emergency strikes, the only thing you care about is they do their job.
You don’t care about color, brand, or special features.
You just need the protection to work in time of danger or discomfort.
… And that’s term life insurance.
Term life insurance is a “no frills” life insurance policy that offers low-cost death benefit coverage at a guaranteed level premium for set periods such as 10, 20, or 30 years. It’s a commodity product that’s competitively priced and consumer friendly.
It’s the financial life boat your family (or business) needs if you die unexpectedly.
Other Types of Life Insurance Policies
However, there are two other major types of life insurance that outsell term 2:1 – universal life insurance and whole life insurance.
These are both forms of lifetime or permanent life insurance, which I would rarely recommend, except in specific business or estate planning scenarios. (These RARE situations are fully explained in the articles explaining each type of insurance in our Smart Consumer’s Guide To Life Insurance series.)
The underlying problem with permanent forms of life insurance is you must pay for the rest of your life.
- The likelihood that you’ll need to protect your dependents for the rest of your life only occurs in rare circumstances. That means you’re committing to a lifetime added expense you don’t need, which then leaves less money for achieving other important financial goals.
- Secondly, you’ll likely have sufficient assets at some point in your life to eliminate the expense by self-insuring what risk remains in your later years. Again, that means buying permanent insurance will cause you to pay an unnecessary expense for a risk transfer service longer than you actually need it.
Surprisingly, the ACLI reports that roughly 2/3 of all individual policies sold in the U.S. are permanent plans, despite these policies not being the best deal for many of those consumers.
Remember, your goal is to purchase the valuable risk transfer death benefit at the lowest cost possible for only as long as you need it because (on balance) it’s a losing bet for the average consumer.
(Sure there are exceptions to the rule, and life insurance salespeople are quick to point out those exceptions to sell the more expensive insurance. But those exceptions merely prove the rule that most consumers must lose. After all, somebody has to pay for those exceptions, the commission to the sales people, the overhead to the insurance company, and the profit to the insurance company investors, and that somebody will likely be you.)
Therefore, smart consumers should think in terms of minimizing their life insurance costs while still properly protecting their family and business relationships for legitimate risks.
That means only purchasing the coverage you need (plain vanilla life insurance death benefit – no bells and whistles) for only as long as you need it (not permanent, and not for the rest of your life, but for the appropriate term).
For example, I don’t own life insurance because my wife and I have accumulated enough assets and planned for my passing in such a way that my family can live comfortably without me. Sure, I’m irreplaceable as a father and husband, but financially, they’ll be fine without me.
I’m “self-insured” because there’s no financial risk remaining to insure.
Your goal should be similar – to use term life insurance as the lowest cost solution to protect your loved ones (and/or business) only during the time necessary so you can dedicate all remaining financial resources to achieving self-insured status as quickly as possible.
Think about it for a minute… buying permanent insurance is an implied admission that you’ll never achieve financial security, will likely fail at your financial goals, and die poor one day because you’re using insurance to inefficiently leave an asset behind that you failed to accumulate on your own. Is that really the financial plan you want to follow?
“Buy term and invest the difference” is a cliché because it’s true. It’s the smart, efficient way to allocate your scarce financial resources because you’ll spend the minimum necessary on life insurance so you have the maximum possible to dedicate to investing toward your goal of financial independence and self-insurance.
Always remember there are commission hungry (or self-deceived) salespeople that will try to divert your attention from those fundamental financial truths (it’s a negative expectancy bet where the average consumer must lose) by pitching you on more expensive products sporting features and benefits that extend beyond the purpose of insuring your life from a risk you can’t afford to take.
If you encounter a salesperson playing that game then just move on, even if it’s your brother’s-sister’s-cousin-in-law.
There are plenty of honest, reputable, independent life insurance agents who will help you find just the right coverage you need at the lowest possible cost without any of the sales games (my recommendation is here, and yes, this is an affiliate link. Just grab a free quote and they’ll follow up to answer your questions).
Insider’s Guide To Life Insurance Quotes
Buying life insurance is one place where I wouldn’t suggest relying on a referral.
Why? Because most consumers know less than you about how to buy it right, so just because a family member or church friend is an agent for a big name company or is happy with her agent means squat.
As stated earlier, you want to buy from an independent agent who can shop the policy for you and can get you the best quote from many competing firms, preferably firms known to specialize in your situation. Never buy from a captive agent.
Captive agents (or career agents) are typically only able to sell products from one life insurance company, or are highly incentivized to sell one company’s products.
For example, if you ask a Northwestern Mutual, Farmer’s, State Farm, or New York Life agent for a life insurance quote, you are extremely likely to get quotes from that particular company only. There’s nothing wrong with that since they openly and fairly represent that company’s products. However, independent agents represent multiple companies so they can “shop the market” to find the best deal for you.
Also, don’t make the mistake of thinking that “shopping the market” is as simple as getting a “price comparison” from one of those online life insurance sites. That’s not how you secure the best deal for your situation because it ignores the role that health class ratings play in the actual price you’ll pay. An online quote may have zero applicability to your unique situation.
That’s because life insurance companies will assign you to a specific rating class before they issue you a personal quote (the generic quote you get assumes best rate class):
- Preferred Plus (PP) (the lowest rate, and what you usually see published)
- Preferred (costs 25% more than PP)
- Standard Plus (50% more than PP)
- Standard (75% more than PP)
- There are also multiple “sub-standard” classes, each 25% more expensive, usually called “Table A through H” or “1-8”.
Here’s the important point… research shows less than 20% of life insurance applicants qualify for the best rate, and different companies rate different personal conditions in different ways. There is no standard.
- So if your mom died of cancer (family history), some companies will penalize you for this and some won’t.
- If you had a DUI a few years ago (driving history), some companies will decline you and some will approve you.
- If you’re 25 pounds overweight, you might still qualify for some companies’ best class, but will be priced higher for the 2nd or 3rd class at other companies.
And there’s a surprisingly long list of conditions that could impact your rate class (which explains why less than 20% of applicants qualify for the best rate!):
- Diabetes Type 1 or 2
- Cancer history
- History of heart disease
- High blood pressure
- High cholesterol
- Elevated liver or kidney numbers
- Sleep apnea
- Tobacco use
- Family health history
- Hazardous occupation
- Dangerous hobbies (scuba diving, sky diving)
- Pilot’s license
- Criminal history
- Driving history (tickets, DUI)
- Drug or alcohol history
- Foreign travel or citizenship issues
A knowledgeable independent agent will know which company to use for your particular situation based on his/her depth of experience shopping many, many policies to these different companies.
The agent’s job is to direct your business to the company who will approve you at the best rating class, not to simply pull up the best rates from all the companies and stick you with the company offering the lowest rate online (because you might not qualify for it after you submit your application).
The way it’s done in practice is the agent will run trial quotes for you at multiple companies because even with extensive experience it’s difficult to tell exactly how different combinations of health and personal conditions will effect the rate class you qualify for at each company. The agent should shop the policy for you by composing an email listing all relevant conditions and personal history to solicit an offer for insurance from each underwriting department. The goal is to find the company that’ll qualify you for the best rate class because that’s nearly always the best price.
In other words, just because a web site quotes you the lowest priced insurance company doesn’t necessarily mean that’s the best price you could actually get approved for given your particular circumstances.
Don’t Purchase Life Insurance From Captive Agents:
The opposite problem occurs when you shop life insurance using a captive agent representing a name-brand product line. This could cost you as much as 50% to 100% more for comparable coverage.
Sure, they might try to tell you that “all the companies’ rates are within a few bucks of each other,” but the research doesn’t support that claim.
Take the example of a 50 year old male, non-smoker, in excellent health, looking for a $500,000, 10 year term policy. Below are 4 sample quotes (taken near the date of publishing) for comparison.
- *Protective Life Insurance Co. – Custom Choice UL, 10 Year No Lapse – $276.77/year
- Primerica Life Insurance Co. – Custom Advantage 10 – $352.50/year (costs 28% more)
- Farmers New World Life Insurance Co. – Value Term 10 – $416/year (costs 51% more)
- New York Life – 10 Year Level Term – $437.50/year (costs 58% more)
*Quotes are for illustrative purposes only. This is not an offer for insurance. The quotes represent each carrier’s top tier, non-tobacco rating, and are subject to change. Source: term4sale.com
The first thing to notice is how the quote from Protective is the lowest price and would likely only be provided by an independent agent, but that’s only half the story because all of these quotes assume you’ll qualify for each of these companies’ best health ratings (as discussed above), which may not be true.
What if you have a minor health concern, like taking medication for blood pressure? You can still qualify for Protective’s best health rating, but there are many companies out there who don’t allow blood pressure treatment in their best health category.
So let’s say you applied to Name Brand Company A, and instead of qualifying for their best health class, you got penalized one rate class for the blood pressure treatment. Now you’ll pay about $520 per year, an 88% increase over Protective’s rate.
Do you see the problem?
It’s not just about finding the best quote. It’s about finding the best quote from the company that will qualify you at the highest rate class given your specific life situation. The difference can be a 10%-70% savings, and no, that’s not a typo.
To find out exactly how to save the most get a no risk, no obligation quote from the experienced independent agent I work with so they can qualify you for the best rate class (click here).)
Buying life insurance is about finding the best quote from the company that will qualify you at the highest rate class given your situation.
More Life Insurance Agent Tips You May Not Know
- Be wary of dealing with a new agent because he or she is a family member or friend. Rookie agents can cost you a LOT of money. Experience does matter.
- Check your agent’s license status (how long they’ve been in business, complaints, and which companies they represent) at your state’s department of insurance website. For example, you might try this search query in Illinois – “Illinois department of insurance Broker/Agent search”
- Is your agent successful? This tip is optional because it’s a bit nosy, but ask your agent, “How much premium did you place last year?” You’re looking for an answer over $100,000, which means they’re probably making 6 digits. Sure, there are good agents making less than a 6 digit income, but the more product you move, the more experience you get with the companies, and you’ll likely get more balanced advice from an agent who doesn’t desperately need your business to put food on the table.
- When an agent quotes you, ask if they can share their screen with you via Skype or send you a screenshot of the quotes they’re seeing. You want to be sure they are quoting you the best rate, not the 5th best because selling that particular company or product helps the agent win a sales contest. NOTE: It’s perfectly acceptable to not quote you the best rate listed if the agent knows you can’t qualify for that rate due to some personal or medical history issue.
In summary, there are many ways to buy life insurance:
- You can buy online from a web site quoting rates, but you won’t know which companies you actually qualify for given your personal situation.
- Alternatively, you can turn to a captive agent specializing in a specific company product line, but that may not get you the best rate.
- Or you can turn to an experienced, independent agent who can help you shop it out at no additional cost to you so you get the best rate for your particular life situation (click here for my recommendation. You’ll get a free quote and they’ll follow up to answer your questions.)
How Much Life Insurance Do I Need?
A life insurance agent’s commission is a function of the value of the policy they sell.
That means they have an incentive to calculate your life insurance need “generously”.
Smart consumers do their own calculation first so they have a benchmark to compare with the agent’s analysis.
For example, let’s assume you’re 40 years old, make $100,000 per year, and plan to work another 25 years.
An agent might look at that and quickly recommend $100,000 per year multiplied by 25 years resulting in $2.5 million of coverage. Unfortunately, that’s not the smart way to do it for the following reasons:
- You probably don’t need to replace 100% of your income – Your family may spend less due to decreased living expenses once you’re out of the picture.
- Excludes investment return – Your spouse will likely receive interest and capital gains on the assets over time, supplementing the capital provided.
- Don’t double dip – Most life insurance calculators (mine here included) factor in the costs to pay off every debt or future obligation you’ll ever have, but your current income factored over 25 years is already paying for those debts, causing you to over-insure for a double payoff. Once those debts are paid that means your income needs will drop accordingly.
- Your spouse can work – Most people don’t like a perpetually sedentary life. Your spouse could choose to return to the work force once the children are raised, or after a period of retraining and education. In other words, you may need to only provide for a few years of income loss as a result.
- Short life expectancy – Not to be morbid, but if you’re a 50 year old female getting coverage on yourself to protect your 60 year old husband who is obese, has diabetes, smokes, and has had two heart attacks, it may be a reasonable bet for you to only buy a 10 or 15 year term policy.
- Other Income Sources – You may not need to replace every nickel of your earnings. Social security often pays out to a surviving spouse, and many pensions and annuities are set up to continue paying to the surviving spouse.
- Calculate Your Own Needs – based on your unique situation using my calculator here so you can factor all these variables in. It’s not perfect, but you’ll have a much better idea of how much you need than simply relying on a quick calculation by an agent with an incentive to sell you more insurance than necessary.
Remember, you want to buy the least amount of coverage necessary, for the lowest price, for the shortest time period required, to manage your risk. That’s because the less you spend on insurance (remember, you’re hoping it’s just a wasted, but essential, risk management expense), the more you have to invest for your financial independence.
The 10-20x Your Income Rule
For example, plugging the numbers from above in my life insurance calculator using $100,000 in income for 25 years of work yields a $1.6 million dollar need instead of $2.5 million. That’s 36% less using the standard assumptions built into the calculator without changing the “living expense” to $75,000. Obviously, additional tweaks could make that number even more affordable.
This takes us to a common rule of thumb used in the industry: your ballpark need will run between 10 – 20 times your annual income, depending on your personal situation.
But with that said, rules of thumb should generally be avoided in favor of a calculator that will take into account the exact circumstances you face to arrive at a number that best reflects your real need.
NOTE: To understand life insurance in business (and how much is appropriate there) as well as using life insurance to pay estate taxes, please see related posts in our Smart Consumer Guide To Life Insurance series here).
Where To Buy Life Insurance – Selecting The Best Company:
Another factor in your decision should be which life insurance company you purchase from because not all companies or products are created equal.
The criteria you’ll use to analyze a company are as follows:
- Financial Health
- Product Choice
Surprisingly, these factors result in less differentiation than you might expect. Let’s look at the reasons why…
The generally accepted best practice for assessing financial health is to purchase only from a company with a rating of “A-” or better from A.M. Best.
Financial ratings matter because your insurance company must have the financial resources to make good on their promise to pay up if you die. An “A-” rating means the company’s ability to meet its ongoing claims obligations is “excellent” in the opinion of A.M. Best. That’s a good thing.
With that said, just about all the big players are rated “A-” or better, so this is less of a factor than you might think. While you absolutely should check the insurance company’s rating before buying, it rarely becomes an issue in the buying decision.
NOTE: The only reason you wouldn’t go with a top rated company is if you have a “hard to place” medical or personal issue preventing you from being approved at other companies. You might need to do business with a “B” rated company in that instance.
In addition, there are 3 reasons to look beyond this generic rating system and dig a little deeper when assessing company financial health.
- Most life insurance companies do business under the umbrella of a larger financial institution or parent company that can help financially if needed. For example, Banner Life Insurance is owned by Legal & General, Reliastar Life is owned by Voya Financial, and Pruco Life Insurance is owned by Prudential (as of this publication date).
- Additionally, if a life insurance company isn’t doing well then its life insurance policies typically get bought out by another company. The “life insurance book of business” is highly profitable even if the underlying company is struggling. That makes your policy obligation a sellable asset that usually gets taken over by a financially stronger buying company.
- Finally, each state has a state guarantee association, which all the companies transacting business in that state must pay into. The association’s job is to help failing companies from going belly up, but if that’s not possible, they help to ensure the policies are bought out and claims are paid. But be careful because most states limit payouts from the guaranteed fund to $300,000 maximum for each insured. You’ll want to check your state’s limits.
To be safe, again, I would try to avoid companies rated lower than “A-“, but if tough medical conditions limit your choice to a B rated company, then just dig a little deeper to decide if it merits further consideration.
Product Choice, Availability and Options
Always remember that the commodity benefit you’re buying with term life insurance is the death benefit for a specified period of time, usually 10, 20, or 30 years.
However, as I said earlier, life insurance companies love to differentiate their products to gain a sales advantage. This practice makes it hard for you to do a straight price comparison because each policy has different bells and whistles that must be accounted for. For example…
- Some companies might include a “Chronic Illness Rider” giving you access to some of your death benefit (while you’re still living) if you get confined to a special care facility.
- Other companies may offer an “accelerated death benefit” rider, allowing you to take some of your death benefit early in the case of terminal illness.
- Still other companies limit your policy choices based on the state you live in, or your age. For example, many companies stop offering 30 year term at age 50 or 55, but at least one company (as of this writing) offers their 30 year term up to age 57.
The only problem is consumers are notoriously bad at valuing these arcane benefits.
- What is the likelihood it will pay off?
- If it does pay off, what’s the real value?
- Is there special language or carefully crafted legal exceptions creating narrow definitions and qualifications in the terms thus lowering the value of the benefit?
Again, the rule is simple – pay only for what you need, and for as little time as you need it.
If you have a specific condition or family history that indicates a specific rider might be important to you then consider it. But be wary of adding bells and whistles just because they sound nice because each is priced to give the insurance company more money than it costs them.
They’re in this business for a profit and they know the risk pricing game inside-out, so be careful.
The rule is simple: buy the least amount of coverage necessary, for the lowest price, for the shortest time period required, to manage your risk.
As stated above, if you have perfect health with no preexisting conditions and no family or lifestyle history to warrant concern, then company selection is primarily based on price and financial strength.
However, if you have any health, lifestyle, or family history issues then you want to seek the insurance company that’ll rate you at the lowest health rating, thus resulting in the lowest premium.
In other words, there are two dimensions to getting your best deal – price, and the health rating you qualify for.
The advantage of an experienced, independent agent is s/he can help you identify the best company that will deliver the best rating and price for your individual situation. And of course, I have my recommended resource here. Just grab a free quote and they’ll follow up with you and answer your questions.
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13 Little-Known Life Insurance Savings Tips
Finally, now that you have the big picture on how to get the best deal in life insurance, we’ll close things out with a few less common life insurance savings tips so you have all the tools you need to make a smart decision:
1. Set Up Your Death Benefit as an Annuity Stream (10%-30% Savings) – Most people buy life insurance to replace their income if they die. However, the policies they buy are set up to pay one giant lump sum death benefit. The alternative is to give your beneficiaries exactly what they had before…a regular income. There are a few companies that’ll discount their regular premium by 10% to 30% if you set up your death benefit to be paid out over 10 to 20 years.
In other words, instead of giving your wife a $1 million dollar death benefit, why not give her $100,000 for 10 years? This is especially helpful when the beneficiary lacks financial skill or has other financial responsibility issues leading you to believe a lump sum payment may get squandered. If that sounds appealing, this agency can help you. Just get a free quote and they’ll follow up to help you.
2. Stagger (or Layer) Your Policies (10%-30% Savings) – Just as you can ladder CDs, bonds, or annuity maturities so you have money at predictable time periods in the future, you can do the same thing with life insurance and save money at the same time.
For example, let’s assume you need $1 million of life insurance today, but you expect that need to decrease over the next 20 to 30 years due to your other investment plans. Many agents would try to sell you a 30 year term for $1 million, but it might be more cost efficient to buy two policies: a 15 year term for $500,000, and a 30 year term for $500,000. This will give you $1 million of coverage for the first 15 years and $500K of coverage for the remaining 15 years to reflect decreased financial need resulting from increased assets in your later years. This better reflects your real financial need and lowers your costs at the same time.
3. Take an Exam (10%-40% Savings) – “No exam” policies are terrific for agents. They cost 10% to 50% more, which then puts more commission in the agent’s pocket. The sales appeal to the consumer is convenience, but at what price?
The truth is there are few situations where it makes sense for you to buy a life insurance policy without taking an exam. This becomes obvious when you think about it from the insurance company’s perspective. Their goal is to write policies on people who won’t die during the term. That’s how they maximize profits.
They’ll ask personal questions on your application, pull medical records, your driving record, etc., in an effort to price your risk of death. Help them out and let them confirm that you are healthy in every way with a full exam. Consent to the blood and urine tests, a blood pressure test, and provide accurate height and weight. It won’t cost you anything but time.
Insurance companies know full well that people with pre-existing conditions will pursue “no exam” policies; thus, they price those policies at a premium to reflect the increased risk. If you’ve got nothing to hide, then consenting to all health tests will save you money by pricing your policy at a lower rate class.
4. Exercise and Eat Right for 1-2 Weeks Before Your Exam – Few people realize the health benefits of eating right and exercising, even for a short period of time like 1 to 2 weeks.
If you’re not clear about this, then just watch the Biggest Loser and notice how morbidly obese people routinely get off their blood pressure and diabetes medications within a few weeks of starting the show.
“One man with a hemoglobin A1c (HbA1c) of 9.1, a body mass index (BMI) of 51, and who needed six insulin injections a day as well as other multiple prescriptions was off all medication by week 3, said Robert Huizenga, MD, the medical advisor for the TV show.”
The body has an amazing, self-healing ability. Treat it right (even for a short period of time) and it will naturally try to find homeostasis – a more balanced, healthier state.
Additionally, few people realize how stringent life insurance companies can be with their underwriting. If your cholesterol surpasses their maximum level allowed for the best class, even by a few points, you’ll get placed in their 2nd best class.
… and that will cost you an additional 25% for 10 to 30 years!
Same thing goes for weight and many other lab levels they consider. They have strict guidelines. One extra health class can cost 25% more, so aim for the best health class possible. Give yourself the best chance to test well by exercising and eating right during the weeks preceding your exam.
- Pay semi-annually or annually instead of monthly (4% to 8% savings) – Paying in lump sums reduces the insurance company’s administrative costs which comes back to you in lower premiums.
- Bundle Policies – Usually, name brand carriers aren’t the best deal, and they can often have strict underwriting requirements for health conditions (as discussed above) further increasing costs. However, there is one exception worth looking into – some insurance companies offer multiple policy discounts. In other words, if you already have your home and auto policy with one company then it’s worth a phone call to find out if adding life insurance would qualify you for a multi-policy discount. If you’re seeking a lower coverage amount (less than 500K) then it’s possible that discount might be enough to make a difference.
- Break Point Discounts – Insurance companies usually charge less per thousand of coverage at specific break points. The most common break points, or “banding” discount levels, are at the $250,000, $500,000, and $1,000,000 coverage amounts. So anytime your life insurance need estimate puts you under one of these round number break point levels make sure you also get quotes at the next break point above what you actually need. There’s a reasonable chance you could get the best of both worlds – pay less money and get more coverage at the same time – and that’s a good thing.
- Replace Your Mortgage Insurance – Mortgage life insurance pays off your mortgage if you die. It’s effectively a declining value term policy because the outstanding balance on your mortgage declines (amortizes) over time. A 20 or 30 year term policy will typically cost less while still providing the necessary protection.
- Buy A Second-To-Die Policy (10%-20% savings) – This savings strategy will usually apply to a dual-income married couple trying to provide for their children or for life insurance used in estate planning. The policy is significantly cheaper because it will only pay out when both people die.
- Group Insurance For Serious Medical Conditions – If you have a known, serious medical condition it can be difficult and tremendously expensive to buy life insurance. One solution is to find large group policies through work or other organizations you’re affiliated with. The underwriting is sometimes as simple as age, gender, and whether or not you smoke, making qualification easy. The savings can be extraordinary depending on your actual health condition.
- Free Insurance – Mass Mutual offers free 10 year $50,000 term policies to individuals between the ages of 19-42 with a household income between $10,000-$40,000 under their Life Bridge program. Check it out if you qualify.
- Don’t Wait / Buy Now – If you’re healthy and need the coverage then waiting can cost you. Premiums can rise by 5% to 12% for every birthday you wait. Plus, you also incur the risk of developing an adverse health condition that might increase your premium. It never gets cheaper to wait so why take the risk?
- Finally, consider shopping your life insurance every 2 years – Your health may have improved or new products may come to market that could reduce your premium. You don’t know unless you ask.
In summary, buying life insurance can be confusing. Smart consumers keep it simple by a following a few common-sense rules.
- Limit what you buy to just what you need by insuring only those risks you can’t afford to take for the minimum time necessary. You do the same with every other insurance and consumption item in your life, so why should life insurance be any different?
- Don’t confuse life insurance with investing by getting sold on complicated policies with lots of bells and whistles. Just buy it for the risk management protection. You do that with every other type of insurance in your life, so why should life insurance be any different?
- Keep it simple, and don’t get swayed by smooth talking salespeople. Only buy from an experienced, independent agent who can qualify you at the best rate class for the best deal by selling only what fits your needs (not what gives him the best commission or sales bonus).
If you stay away from whole life and “no exam” policies and follow the rules in this guide, then you’ll be well-armed to make a smart decision on your life insurance purchase.
And if you have any questions or want a quote, then contact this recommended independent agency because they walk-the-talk with everything taught here. Just grab a free quote and they’ll follow up to help you!
Independent Agents Can Save You Up To 73% On Life Insurance
Applying to the life insurance company with the “lowest quote” rarely gets you the lowest rate.
Independent agents know which company to place you with according to your specific health and insurance needs. Click to compare rates using the agency I’m affiliated with and trust.
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