Life Insurance Tips

Top 10 Ways to Save on Life Insurance

Just as there are different life insurance plans to meet your needs, there are different ways to save money on life insurance.

The most important is to shop around. There are hundreds of insurance companies, offering a wide variety of plans and prices. You could save big bucks, just by doing some comparison shopping.

Here are 10 more ways you can save money on your next life insurance purchase:

Consider term insurance

Some financial planners advocate life insurance policies with cash value components because they force you to save money. Others recommend you buy term insurance for the cheaper premium, and then invest the money left over in mutual funds or other investments.

The Texas Department of Insurance claims for those who want to save money, or who cannot afford the larger premiums for whole life policies, term insurance is a good option: "Term life insurance usually gives you the most coverage for the least cost."

If you choose to buy a whole life policy, there are also ways to save money. "You may save money, particularly in the purchase of cash value policies, by buying a policy with low administrative fees," the Texas Department of Insurance advises. "A small number of companies sell these 'low load' policies by mail or telephone. Financial planners, licensed as insurance counselors, also may sell low load policies. Generally, these planners charge service fees and do not receive commissions. Since the initial fees are low, they reduce your risk of losing money if you cash out early."

Cash value in life insurance should not be considered a traditional investment, because any partial withdrawals or loans will reduce your death benefit. Also, if you partially withdraw or take out a loan against your cash value, and the cash value exceeds the premiums you have paid into the policy, you will be hit with a tax bill. In addition, every year you own the policy, more of your premium money goes to pay for the cost of insuring you, and less of it goes toward the cash value.

Furthermore, the difference in price is not just a matter of a few dollars per year. According to LIMRA International, a financial services trade association, the annual premiums for a universal or whole life insurance policy could be eight or nine times more than a term life insurance policy with the same death benefit.

Seek out no-commission policies

"No-load" or, more appropriately, "low-load" life insurance policies have fewer expenses built into them, such as agent commissions and fees for marketing, than more traditional life insurance policies. This can mean lower premiums. For variable life insurance, these lower expenses mean a higher percentage of your premium goes to work for you right away, allowing you to build your cash value faster.

No-load policies can be purchased through financial advisors, who charge "flat fees" rather than collect commissions from insurance companies. Several companies also sell "no-load" or "low-load" policies directly to customers.

Don't buy a guaranteed issue policy if you are healthy

"Guaranteed issue" term life insurance policies, also called "simplified issue" or "quick issue" policies, require no medical exam and are sold to anyone who comes along. For this reason, guaranteed issue policies are riskier for the insurer than policies that require medical exams, and are thus more expensive than regular term insurance policies. While these policies can be a great way for people who have medical problems to obtain life insurance, if you're healthy, you'll get better rates by taking the tests.

The high premiums, combined with a low face amount for the death benefit, can make guaranteed issue life insurance a less desirable option. For some of these policies, you could end up paying more in premiums after only a few years than your beneficiaries will ever receive from the insurance company.

The problem of consumers paying more in premiums than their beneficiaries will receive in death benefits has drawn the attention of state insurance regulators. The National Association of Insurance Commissioners (NAIC) has established a working group to consider what, if any, actions it should take.

Although critics have questioned the ethics of selling insurance products that might perform worse than a savings account, no insurance companies seem to be making excessive profits on these policies, according to Ernst Csiszar, the director of the South Carolina Department of Insurance and the chairman of the NAIC working group on small face value life insurance.

"We are developing a disclosure statement that would warn consumers of the possibility that they might pay more in premiums than the face value of the policy," says Csiszar. "Anything more than that would potentially be a form of rate regulation, and the consensus of the NAIC is that we are simply not prepared to regulate the rates of life insurance."

Shop online first

While not all online life insurance quoting services will give you the best quote available for term life insurance, they can still be a useful source of information about prices. Just remember, the more personal information you give, the more accurate your online quote will be, but "the lowest quote" should still only be used as a baseline for shopping around.

Improve your health

Having health problems can make it hard for you to buy life insurance. High blood pressure, diabetes, and heart disease are among the conditions that can make life insurance companies reluctant to sell you a policy.

Life insurance companies want their policyholders to be in good health at the time of purchase. You're rewarded with lower premiums if you're in excellent health, because it reduces your chances of dying sooner. Dr. Robert Gleeson, a vice president and medical underwriter at Northwestern Mutual, says many companies are dividing up their non-smoker rating classes into as many as five different categories based on many different types and combinations of medical conditions.

Then there are rates for smokers. Research shows smokers pay nearly three times the premium of non-smokers, and you can't quit the day before you apply. According to Gleeson, no company will offer you a non-smoker rate if you've quit for less than a year. For many companies, the minimum "nicotine free" period is two years for a non-smoker rate. Some companies will consider you a smoker as many as five years after your last cigarette.

If you smoke marijuana, pipes or cigars, but not cigarettes, you still must admit to being a smoker on the policy application, although insurers don't generally differentiate between different types of smoke inhalation. (Marijuana users must also disclose their drug use.)

Insurance companies use urine tests to check for the presence of nicotine. If you chew tobacco, you might end up with smoker rates on your life insurance policy.

If you're healthy but somewhat overweight, you still might have a hard time buying life insurance. Even if you're not obese, there are some cases where you'll have to pay more for life insurance if your weight reaches a certain level. In most instances, the heavier you are, the more you'll pay.

If you have a pre-existing medical condition that could lead to higher rates, by showing your insurer a history of improving your health, taking your medications regularly, and acting responsibly about your health, you'll make your underwriters happier and probably get yourself lower life insurance premiums.

Don't buy more, or less, than you need

Many experts say the best way to determine the amount of life insurance you need is a needs analysis. It's a basic formula: short-term needs + long-term needs - resources = how much life insurance you need. Michael Snowdon of the College of Financial Planning in Denver says this method is "probably the most accurate approach in what is an inaccurate and imprecise science."

Experts advise you do an analysis at least once every three years, or whenever you have a major life change. For example, if you have a new baby, you have to recalculate college education needs and child-care costs. If you own a home, a mortgage is likely your biggest financial burden. Because your mortgage balance decreases with each payment, it's important to include those revised figures in your calculations.

If you need more life insurance, get a rider as opposed to a new policy

Just because your needs change doesn't mean you should run out and buy a new life insurance policy. In many cases a rider - an amendment to an insurance policy - can let you expand your coverage without sacrificing your built-up cash value. At the same time, be sure to shop around. If you're still in good health you might be able to get a better deal by buying a second policy to supplement your original one.

Buy as soon as the need exists

An advantage to buying life insurance earlier in life is your premiums will be lower. As you age, life insurance gets more expensive. Many term policies give you the option to renew your coverage at the end of the term without undergoing another medical exam. You also can lock in low premiums by asking for a "level premium" policy, which means for a specific time period, say 20 years, your premium rate stays the same. After that term expires, your rates will increase.

If you don't have any dependents, your money might be better spent elsewhere.

Check your credit report before you apply

Just as you should check your credit rating before applying for a loan, you should have a look at your credit report before purchasing a life insurance policy.

If there are problems with your credit, you could be denied coverage or be placed in a higher risk class because insurance companies will be concerned you would let the policy lapse due to non-payment of premiums. If this happens in the first few years a life insurance policy is in effect, the insurer stands to lose a lot of money because of the high up-front commissions they pay to agents.

According to Tom Spinelli, a research manager at LIMRA International - a financial services marketing and research organization - some general agents, who supervise insurance agents, can earn as much as a 90 percent commission on the premiums you pay on a life insurance policy for the first year. That number can soar to more than 100 percent due to the bonuses typically used by life insurance companies as sales incentives.

Fractional premiums

Once you've found the best insurance policy for your specific needs, find out if you can save money by the way you're billed. Some insurers charge you less if you pay annually, and more if you pay monthly.

In general, the fewer payments you make over the course of the year (known as fractional premiums), the less you'll pay overall. Also, some insurers charge less if they can deduct the premiums directly from your checking account.

Saving money after you've bought a life insurance policy

Just because you've been put in a relatively expensive rate class by your life insurance policy doesn't mean you're out of luck.

According to Dr. Robert Gleeson, a vice president and medical underwriter at Northwestern Mutual, if you see your doctor regularly and establish a record of being a "responsible patient," there's a pretty good chance you can improve your insurance rates.

"If you have a rate-able impairment, ask your insurance company if you can apply for a rate reconsideration in a year or two," says Gleeson. If you've established a history of lowering your blood pressure, cholesterol, or any of the other controllable rate increasing factors, many insurance companies will be willing to lower your premiums, says Gleeson.