Using these tips will help you keep more of your money in your wallet.
There are many reasons to buy life insurance: for final expenses, to provide and income, to leave an inheritance, and more. But life insurance can be a very costly commodity. It has to be for the insurance company to be viable. You are purchasing hundreds of thousands and in some cases, over a million dollars of coverage, in exchange for (give or take) one hundred dollars a month. While the cost may seem astronomical especially since your household already has other fixed living expenses, life insurance is a must if you have a family dependent on you. Since the cost is unavoidable, the next best thing is to find ways to reduce the cost. Here are 13 tips to save on life insurance.
- Apply when you are young and healthy – Life insurance premiums are based on mortality rate, which in turn is based on age and health. The younger and healthier you are, the less likely you are to die in the near future. Therefore, you’ll pay less for an equivalent amount of insurance at a younger age. In insurance terms, your actual age is not always the age the insurance company uses. Your insurance age is the closest age. This means that if you are more than six months past your birthday, you will be considered a year older and pay a higher premium.
You’ll also have a better chance of being accepted at standard or preferred rates if you’re living a healthier lifestyle. This not only includes maintaining a healthy weight, low blood pressure, low blood sugar levels and low cholesterol, but also includes mental health and lifestyle activities.
Besides saving money, the other advantage of buying insurance when you’re young and healthy is the ability to lock in your insurability. This means that even if your health should turn poor in the future, you don’t need to worry about your policy since
- Buy term – There is a big difference in premiums between term and permanent life insurance. For example, a 40 year old male non-smoker would pay $360 annually for $500,000 of term-10 insurance, while the same person would pay $4,355 annually for the same amount of whole life insurance. Buying term offers huge savings during the initial term, but beware when the renewal comes up. In the above example, the $360 will increase to $2,675 annually from year 11-20, and $6,920 from year 21-30.
You do have the option of cancelling the policy and apply for a new one at renewal time for a lower premium. Using the above example, once the 40 year old hits 50, he can apply for another term-10 policy for $850 annually. The major concern is whether his health has changed in the past 10 years that would make him uninsurable or insurable at a higher rate.
- Work with a broker who can compare rates – Not only are initial rates important, but renewal rates as well. It would be foolish to pick a term-10 policy that saves $5/year in the first 10 years but costs $1,000/year more in the next 10 years. You read that right, $1,000 annually. Some policies compare favourably in the initial term but are completely outmatched in premium when renewal comes up, knowing that some brokers and applicants neglect researching past the initial term.
Many insurance companies offer bonuses and vacations to brokers who meet a certain commission threshold. If you’re working with a broker who only deals with one carrier, chances are he won’t be able to find the best policy for your specific situation.
- Cover letter – This is a letter written by your broker to the insurance company to provide more information on items not discussed in the application. For example, he may write about why you need the amount you applied for, your family situation and your hobbies. All of this helps the underwriter understand you as a person and not simply as another application. If your application seems reasonable and does not arouse any suspicion, then the underwriter will feel more comfortable issuing a policy with better rates. Make sure you work with a broker who does both #3 and #4.
- Preferred rates matter – You may be familiar with how auto insurance premiums are less costly for experienced and safe drivers. Well, the same standard applies to life insurance. Look for companies that reward good health and lifestyle with preferred rates. This will save you up to 30% annually.
- Multi-life policy – If there are multiple people to insure in your family, such as your spouse or your children, you can save on policy fees by putting all the coverage under one policy. This is referred to as multi-life or combined coverage. Instead of paying up to $100 annually per policy for multiple policies, you can put all the coverage under one policy and pay for a single policy fee.
- Quit smoking – If you smoke, your life expectancy will be lower than non-smokers. Therefore, you must pay higher premiums than your non-smoking counterparts. Smokers pay anywhere from 50% to 200% more than non-smokers and are considered those who have used a tobacco or marijuana in the past 12 months. Typically, premiums for smokers will increase by a greater percentage on term policies compared to permanent ones. To have the insurance company classify you as a non-smoker and have future premiums reflect this, you must be smoke-free for at least a year. Quitting is tough, and this is probably the hardest to accomplish on the whole list.
- Lifestyle choices matter – Besides smoking, other lifestyle choices that affect your premium include drinking, avocation and driving habits. Heavy drinkers, people who engage in extreme activities and drivers with a record of speeding will have higher premiums to compensate for their high risk behaviour.
- Don’t buy mortgage life insurance – We’ve covered this in a previous post telling you why you should avoid mortgage life insurance. Cost is one of the factors. Because lenders do not do any underwriting to properly assess your risk, they lump you in with others who may be less healthy and apply the same premium for all. Stick with an individual life insurance policy and you’ll see big savings on your premiums.
- Pay annually – Most insurance companies offer payment on an annual or monthly basis. Some even have quarterly installments. The annual payment method, which is less than 12 times the monthly payment method, is the least costly payment method, since the insurance company receives all the premium up front.
- Rate bands – The premium associated with coverage amount depends on the rate band. You can think of the rate band as a range of coverage with stepped premiums. Coverage at the top of the range will be more expensive than coverage at the low end of the next bracket. For example, you’ll often see that $249,999 of coverage will be more expensive than $250,000. This is the point where one bracket ends and another begins, and there are several of them all the way to the maximum insurable amount.
- Ask to be underwritten again if health improves – If you’ve been accepted at a substandard rate due to poor health or lifestyle choices, it’s not too late to have your premiums readjusted once your condition improves. Similar to the section about smoking where you can apply to lower your premiums once you cease smoking for at least a year, you can do the same in other areas of your life. For example, if you’ve lowered your blood pressure, cholesterol levels, blood sugar or weight, or you decreased your alcohol consumption, you can also apply to have your risk reconsidered. You’ll likely have to undergo different underwriting requirements again to confirm your improved health.
- Opt for less coverage – Lastly, you can always decrease the amount of life insurance. The premium you pay is proportional to the amount of coverage you choose, so less coverage equals lower premium. You should try all the other tips before you use this one, since having enough protection is always the first priority. Some policies also allow you to lower your coverage once the policy is already in force, so should you run into cash flow problems in the future, this can be an option to lower your cost.
So there you have it, 13 tips to save on life insurance. Most of these can also be applied to other types of insurance, such as disability and critical illness. Keep these tips in mind the next time you apply for life insurance. You may be able to save thousands of dollars over the lifetime of the policy.
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