When buying life insurance, there are ways to save money, but they don’t always involve paying a lower premium. And a low premium doesn’t mean you’re saving if you buy the wrong benefits. Make your specific needs a priority. Here are some ways to maximize your life insurance dollars.
4 Important Considerations Before You Buy
- Focus on trustworthy and financially sound companies. Dozens of companies sell life insurance, so make sure to choose companies with high ratings from two or more independent rating agencies. A low premium from an unstable company isn’t a good buy.
- Shop around to get a sense of premium prices. You can research quote services on the Internet or you can ask an agent or broker to get you a premium estimate for you. As part of this research, determine which rate class works for your financial situation. Most companies that sell individual life insurance have several different price classes—usually called Preferred (non-tobacco), Standard (non-tobacco), Preferred (tobacco), and Standard (tobacco). A small percentage of people have health conditions or histories that disqualify them for even “standard” rates. Many in this group will be offered insurance at “impaired risk” or “nonstandard” rates.
- Take a look at group insurance/employer-sponsored life insurance, even if you have to contribute to it financially. Employers often subsidize their group insurance costs, so it can be less expensive than individual life insurance. You might obtain coverage up to a certain level without providing evidence of good health, an advantage for some people. You’ll probably pay premiums through payroll deduction, which can be a nice convenience. However, make sure to compare group and individual rates, as depending on your age and health status, group insurance may or may not provide a savings. In comparing group to individual life insurance, remember that if you have over $50,000 of group life insurance, IRS tables determine how much it costs to provide the amount over $50,000 and charges you taxable income for that cost.
- Make some lifestyle changes and focus on improving your health. Find out which rate class you’ll be grouped and, if necessary, consider making some lifestyle changes—don’t smoke, maintain a healthy weight and exercise regularly—to qualify for a more favorable rate class.
Ready to Buy? Make sure you:
- Shop around to get a good rate. Life insurance is a competitive business, and you’ll find differences of hundreds of dollars (for annual premiums) even among financially strong companies for essentially the same policy.
- Consider the net cost index. How can you compare two policies, one with premiums that start lower than the other but later are higher than the other? Or one with low premiums and a low cash value, the other with higher premiums and a higher cash value? Use a net cost index—a standard method for collapsing these variables into one number. The lower the number, the better, but ignore small differences (since the indexes are approximations based on assumptions, small differences might not signal true differences in values). The agent or broker with whom you’re dealing, or the company from which you’re considering buying a policy, will provide these index numbers.
- Be aware of premium discounts for particular amounts of insurance. Most companies offer rate discounts for specified insurance amounts. For example, you might actually pay a smaller premium for $250,000 of life insurance than for $200,000, or for $500,000 of life insurance than for $450,000, because a discount “kicks in” at the higher insurance amount.
- Pay attention and be careful when it comes to “fractional premiums”. Typically, you can pay your life insurance premium once a year, once every half-year, once a quarter, or once a month. Although paying quarterly or monthly might seem to be easier to fit into your budget, some companies levy high charges for paying premiums frequently. Others levy quite small charges to do this. If a company levies high charges for paying more frequently, try budgeting so that you can pay your premium only once or twice a year.
- Look for renewal guarantees when buying a term policy. A renewal guarantee gives you the right to start a new term after the current one ends, paying a higher premium based on your current age, but without requiring you to undergo a new health exam or submit any other “evidence of insurability.” Without the guarantee, you’d have to shop for life insurance all over again, and if your health has deteriorated, you might have to pay much more or not get it at all.
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