5 Tips for Buying Better Life Insurance
In this article, we provide you with the 5 key tips you need to know to make a wise choice in buying life insurance—tips that can definitely save you money on your life insurance selection.
Tip #1: Know Your Need
In considering life insurance, the first question you need to ask is: Do I need it? This is an individual question based on your specific situation. If, for example, anyone depends on you financially, you definitely need life insurance. If you were to die, would you leave behind a spouse and / or children who could use financial help?
Life insurance can lessen burdens of those left behind. It can eliminate personal or business debt, pay off a mortgage, pay off medical bills, provide a tax-free financial benefit, etc. As a result, it can provide valuable peace of mind for the policy-holder.
Answering the first question in the affirmative leads to a second question: How much do I need? Again, this depends on your specific circumstances. Do you have a spouse who needs to replace your income? Do you have a mortgage to pay off? How much debt do you have? Do you have children you would like to send to college? (Do you have daughters who will eventually get married? Remember who pays for those weddings which aren’t cheap!)
Of course, in this needs assessment, you also need to work within your budget. So, determine how much you can comfortably spend on life insurance, but also recognize that this could be a priority item for your family.
Tip #2: Understand What Life Insurance Is
Life insurance is a great risk management tool, but there may be better ways to grow your money. This means you want to purchase the best coverage you can for your situation instead of looking at life insurance as an investment. (Although, in some select situations, life insurance can offer positive, tax-privileged growth of one’s money.) Maximize your life insurance budget for protecting your family, etc.
Tip #3: Find the Right Kind of Life Insurance for You
The next important key to buying life insurance wisely is to determine the right kind of life insurance for your particular situation. Are you married with a big note left to pay on your mortgage? Do you have young children? If yes, term insurance may fit your needs for now.
Term insurance is coverage for a particular term, such as ten, fifteen, or twenty years (or thirty years, if the purchaser is young enough). This kind of life insurance is the least expensive, at least in the beginning. During the term of the policy, your premiums will remain the same; however, if you outlive the term (which most people do), your premium will escalate (and will continue to do so) in such a way that it could become too expensive to hang onto. But if you have younger children and want to make sure you provide for them until they reach their twenties, then term will do that for you.
Do you want to make sure funeral expenses are covered? Do you want to guarantee you are leaving money to loved ones? If yes, your need is for permanent life insurance.
There are different kinds of permanent insurance, such as whole life, variable life, and universal life. Whole life can be the most expensive, and, in most cases, is probably better suited for a small ($2,500 – $15,000), final expense plan (such as one to pay for funeral expenses).
Variable life can be purchased as a whole life product or a universal life plan, but it is the riskiest, as money you pay into it can be lost. It has sub-accounts that act like mutual funds. If the market goes up, great! If the market goes down, you lose out. Consequently, if your accounts do not do well, your life insurance could collapse.
Universal life policies, by and large, provide a greater amount of life insurance for your dollar. Universal life got a bad rap from the 1980s, as policies then were built on high interest rates. So, when the interest rates fell, policies collapsed. However, most insurance companies have learned their lesson and are building universal life policies to last. While, in extreme cases, there are still some universal life policies that could potentially collapse, there are some carriers that guarantee the policy to remain in effect (without an increase in premium) till death or age 120, whichever comes first.
Tip #4: Use a Broker to Shop Many Life Insurance Carriers
By using an independent insurance broker who can shop MANY different life insurance carriers, you are more likely to get the best deal for your life insurance needs. In addition, a dedicated broker can help you get the right plan to fit your needs.
Premiums at a given insurance company are the same whether you apply online, by phone, or work with a broker. So, make your buying experience a better one by using a broker who is looking out for your best interest.
Tip #5: Don’t Fall for the Lowest Life Insurance Quote Advertised
This is an important tip. I hear many life insurance advertisements promote a sample quote, such as: “If you are a male nonsmoker, age 40, you can get $1,000,000 of term insurance for ____________.” The blank is usually filled in with a premium reflecting the very best insurance rating for a 10-year term.
First of all, few people are interested in a 10-year term, which is going to be much cheaper than, say, a 20y-year term, etc. So, the advertisements I hear typically provide a quote for a term most people won’t buy.
Secondly, the quote provided is usually the best rating an insured could get. What do I mean by rating?
When you submit an application for life insurance, that application goes to underwriting. There the underwriter determines what kind of risk you are to the insurance company. This means the insurance company has to guess how soon it might have to pay your death benefit, if, in fact, it ever will. The sooner the insurance company thinks it will need to pay out for you, the worse your rating will be.
Typically, ratings will begin with something like preferred plus. The next rung down the ladder is the preferred rating. Then comes the standard rating. This is followed by Table A, then Table B, etc.
The preferred plus rating is the very best rating. Less than 10% of the population will get that rating. However, the preferred plus rating is usually the rating used in life insurance advertisements.
The Advertised Life Insurance Quote Sleight of Hand
Why do life insurance advertisements provide sample quotes that very few people will be able to get? They do it so they can advertise the lowest quote possible for their life insurance. Advertisers know that many (or most) people they reach will think that is the quote at which they can get life insurance with that company. But it is simply not realistic.
I rarely provide people with a preferred plus quote. In fact, most of the time I won’t provide people with even a preferred quote. If there is a difference between what I have quoted and what the insurance company ends up offering after underwriting, I want the difference to be a positive one for my client. I would much rather have the insurance carrier to come back with a better offer than I have quoted rather than a worse one.
Avoiding a Bad Experience with Life Insurance
Unfortunately, most people who fall for the insurance advertisements’ low sample rates will have a bad experience. Typically, they will end up with an offer from the insurance company that is a much higher premium than they heard advertised.
And who knows what companies those advertisers are quoting? If you apply for the wrong company (even one with the advertised lowest rates), you could end up paying a much higher premium. Sure, that company may have a low rate for preferred plus, but that same carrier may really ding you for any health condition you may have. This will result in a higher premium than you might have gotten with another company.
So, don’t fall for the lowest quote advertised.
When buying life insurance, keep in mind these five critical tips: 1) know your need; 2) approach life insurance as risk management; 3) find the right product for you; 4) shop many carriers; and 5) don’t fall for the lowest quote advertised. If you do, you will save money, and you will protect your family in the best way by getting the right product for your situation. Here’s to happy shopping!
