Life insurance costs can seem strange and weird–not to mention boring and irritating–to most people. Life insurance is a product most people don’t like thinking about not only because it can seem so dull but because it requires them to think of death–typically their own.
Yet it is possible to understand life insurance costs, and with that it becomes easier to understand the value of this quite amazing financial product.
MORTALITY TABLES
Mortality tables are piles of organized statistics on risk factors for death probabilities compiled from across the nation. Mortality tables are used by statistical scientists called actuaries to figure a life insurance company’s premium pricing. An insurer prices a policy to: pay for overhead; have enough money to invest; make a profit; and minimize its own risk. Actuaries consider: gender, age, smoker status, and “preferred risk” factors. They will then make actuarial adjustments based on a more rigorous medical exam of a given individual who applies for life insurance. “Preferred risk” status is conferred upon individuals who don’t smoke and whose medial exams return results saying they are healthier than average for their age, and this risk level results in lower premiums for a given policy, sometimes dramatically so.
COSTS GOING DOWN
Most people might be surprised to learn that when adjusted for inflation, the cost of life insurance has been going DOWN for over a decade. Not many products in any industry can boast that. Why is this happening? People on average are smoking somewhat less, getting more active, and receiving better life-sustaining medical care in their old age. In short, they’re living longer, and that’s reducing life insurance companies’ risks. Individual actions have a group effect on life insurance premiums. Furthermore, the costs of doing business for life insurance companies and agents has been going down with the rise of new technologies such as the Internet.
HOW CAN I SAVE ON LIFE INSURANCE COSTS?
Many people complain that they are “insurance poor”, meaning they feel like they have too much discretionary income going to insurance premiums–with life insurance usually the most despised (and thus first to be dropped) among these. Many life insurance agents don’t help, either–they are trained to “not leave money on the table” after doing a Financial Needs Analysis with a prospect or a client, and they usually have their own bread riding on the outcome of a meeting.
Which leads to a couple of first tips to save on life insurance costs: don’t buy coverage you don’t need or really isn’t in your best interests. Guess what that means for you? Forget “whole life” insurance. You have no business wanting life insurance for your “whole life” unless you’re buying a policy after age 60. Life insurance is intended to be a temporary risk minimizer while you build personal wealth. You want term life or, if you’re more financially sophisticated, universal life.
Agents from major companies often try to push whole life because it pays them the biggest commissions. Ergo, tip the next: try to do business (if possible WITHOUT sacrificing customer service or financial advisory quality) with a life insurer that prices in only tiny commissions in its premiums. Insider secret here: you may want to get life insurance through a full-service, fee-based financial planner who doesn’t care about life insurance commissions. Along these same lines, do not buy any “riders” on your policies. These things cater to people’s irrational fears and lack of financial planning sense to line the pockets of insurance agents. If an agent brings one up just tell him “no, end of discussion”.
Speaking of premiums: do buy as much life insurance at one time as you can afford. Life insurance agents actually aren’t kidding when they say everyone should have coverage 8 to 10 times the amount of their annual income. As you buy larger amounts of life insurance, the price per thousand dollars of coverage usually goes down past certain thresholds such as multiples of $250,000. As with most things, buying by volume is cheaper in the long run.
Also, if you feel you could have qualified for lower premiums (for instance, you don’t smoke but chew tobacco so were given smokers’ rates), negotiate with the insurance company. You have the right to drop the policy, and they want your business. (Note: don’t be crazy, though. If you’re a smoker who jogs you may not have a leg to stand on.)
Another way to save money with respect to your medical condition: make it better. If you know you’re overweight but need life insurance, take a small policy for one year, start working out and lose weight, then apply for the policy you want next year to save big time on premiums.
If you have a pre-existing condition, try to find a specialist life insurance company that caters to people just like you. A good financial advisor or planner can help with this, as can insurance brokerages.
Also with regards to premiums: beware of churning! This is a ILLEGAL practice where a slimy agent dupes a client into taking money out of an existing life insurance policy to fund a brand new one “for free” with the same company. Life insurers are quick to compensate clients for being victimized by one of their agents, however, so contact the state insurance bureau if you suspect foul play.