October 2006
Paying too much for life insurance?
The answer is almost certainly yes. Follow these tips to cut your costs
Term life-insurance rates have dropped so dramatically since the 1990s, and Web users have such a powerful shopping advantage, it’s probably well worth your while--thousands of dollars worth--to update your coverage.
Say you bought a $500,000 20-year guaranteed level term policy back in 1996, when you were 50 years old. Assuming you were a male nonsmoker in good health, you qualified as a “preferred” risk and paid about $1,825 a year in premiums.
Today you’re 60. If you’re still in good health, you can replace the remaining 10 years of that same coverage for $1,355 a year, says Byron Udell, founder and chief executive of www.accuquote.com, an Internet life-insurance broker. That yields $4,700 in reduced costs over the next 10 years.
The savings are even bigger in a pure apples-to-apples comparison. Take a 20-year $500,000 term policy that would have cost your brother $1,000 to $2,000 a year in premiums in 1944 when he was 40 years old. If you are a 40-year-old male today, you can get the same coverage for as little as $355 a year. That leaves about $13,000 to $33,000 more in your pocket than in your brother’s.
Since 1994, premiums on standard-risk term insurance have dropped 50 percent, while those for preferred-risk customers have fallen 65 percent, according to data compiled by the Insurance Information Institute, an industry trade group.
Many factors have contributed to the drop. Competition has increased among insurers, partly because consumers have more information than ever about rates. Insurers have also found ways to cut the cost of everything from marketing and distribution to required medical exams. Finally, Americans seeking insurance have continued their long march toward greater health and longevity, while automobile and highway safety improvements continue to reduce fatalities.
In addition to looking for smart ways to save, we took cost-cutting strategies to the next level by mining the extensive Accuquote.com database of insurers. We found several steps you can take to qualify for a better risk rating class, which will save you $1,200 to $42,000 over the life of your policy. (See “Cut your premium by reducing risks”.)
Savings that big are worth an agonizing kitchen-table face-off with a life-insurance sales agent. Thanks to insurance shopping Web sites, the process can be a lot less painful, and you can quickly zero in on the lowest-priced policies offered by mammoth and small insurers.
Here’s the quicker and less painful way to shop for life insurance.
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Figuring out how much insurance to buy may be the toughest part of the process. The $320,000 average term life-insurance death benefit purchased in 2004, the latest year for which data are available, may seem like a nice chunk of change until you add up the costs of paying off the house, college tuition 10 years from now for one or more kids, and other family living expenses over the years. Plan to cover your surviving spouse’s needs until his or her retirement.
At best, any benefit estimate you come up with will be imprecise. That’s why we recommend that you play with an online needs calculator to determine your Ford- to Cadillac-level coverage, and then pick an amount that both you and your spouse can afford.
We like the calculator produced by the Life and Health Insurance Foundation for Education,
a nonprofit formed by seven insurance groups, at www.life-line.org/build
/ insurance_needs_calculator/index.php?pt=lfinc&m=1. Its detailed questions will get you thinking about the issues you need to consider.
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More insurance agents these days are also offering financial-planning services, which means they sell investments and will probably try to sell you whole-life or cash-value insurance, which is part insurance and part investment vehicle. A variation on this is “return of premium” insurance, which pays a benefit if you die or gives you back your premiums (without interest) if you are still alive when the policy expires--a setup that amounts to part insurance, part savings.
Cash-value insurance can provide both estate-planning and tax advantages for well-to-do people over 60. But for 20- to 50-year-olds, Consumer Reports has long recommended a term-life policy as the simplest, least-expensive way to insure against an untimely death.
“Every time I look at the rate of return of cash-value vs. term insurance, I’m not impressed,” says Glenn S. Daily, a fee-only life-insurance adviser in New York. He says insurers often overstate the rates of return promised on whole life.
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Shop for the lowest rates using an online broker with ties to many insurers, not just a few. In most cases, you can get rate quotes from a dozen insurers in about 30 seconds. We like Accuquote.com because it draws on a database of 150 insurers, but you have to give up your name to get an online quote, which is typical. You can get quotes anonymously at www.findmyinsurance.com and www.lifeinsure.com. It really doesn’t matter which Web site you use, because the quotes they give are merely guidelines. Premiums are ultimately determined by a process involving a detailed application and a medical examination. Use online rate quotes as a first step in your research, but understand that you might pay more after the doctor checks under your hood and kicks your tires.
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Get a physical from your family doctor before you apply for insurance so you won’t be unpleasantly surprised. If you’re overweight, try to shed the extra pounds. Do whatever else your doctor recommends to get your stats in line.
Better yet, use your checkup to get serious about your health and learn what changes you need to make to move up to a better risk class. One of the biggest money savers is to quit smoking cigarettes, we found when we analyzed the premium savings possible with 12 lifestyle changes. Estimates are based on Accuquote.com rate data for various negative risk factors.
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You can apply for insurance online, which by state law will require contact with a licensed insurance agent. Before you go too far, size up how well the agent knows the underwriting quirks of various insurers. That’s because each insurer sets its own criteria for rate classes. For example, if your cholesterol level is 235, you can’t qualify for most insurers’ Preferred Plus rate class. “But at Genworth, you can,” says Udell of Accuquote.com, whose salespeople have software to help them identify underwriting criteria to the customer’s advantage.
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You buy insurance for peace of mind, so you don’t want to worry about whether your insurance company will drop dead before you do. Ideally, buy insurance only from carriers top-rated for financial soundness by A.M. Best, Fitch, Moody’s, Standard & Poor’s, and Weiss.
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Because the amount of coverage you need is based on your income and family responsibilities, reassess your coverage as those variables change. You should recalculate your insurance needs if your income has increased significantly; you’ve married, divorced, or added kids to your family; or have begun caring for an elderly parent. When your kids are grown and you’ve saved enough to take care of your spouse during retirement, you can think about dropping your policy altogether.
