Life Insurance Basics |
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Buying a Policy? |
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How
can I save money on life insurance?
There are ways to save money when buying life
insurance, but they don’t always entail paying a lower
premium immediately. As your top priority, look for a policy
that meets your needs. Buying the wrong benefits for a low
premium is a waste, not a saving. Beyond that, here are some
ways to maximize your life insurance dollars.
Before you buy
Once you’ve determined what type of life
insurance product to buy:
- Focus on financially sound companies.
Dozens of companies sell life insurance. Limit yourself
to companies with high ratings from two or more independent
rating agencies. A low premium from a shaky company isn’t
a good buy. See How do I choose a life insurance company?
for more details.
- Shop around to get a sense of
the premium you’re likely to pay.
Quote services on the Internet may serve this purpose,
or you can ask an agent or broker to get you a premium
estimate. As part of this research, determine which rate
class you’ll fit into. 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.
- Look into group insurance.
Consider participating in your employer-sponsored life
insurance program, 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.
- Take care of yourself.
Find out into 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.
When you're ready to
buy
- Shop around to get a good rate.
Life insurance is a very 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.
- Beware of “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.
- If you’re buying a term
policy, look for renewal guarantees.
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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