How to Save Money on Life Insurance

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Before you approach an insurance agent, determine how much insurance you need to buy. Rule of thumb: Life insurance coverage equal to seven times annual income for the breadwinner of a family of four. If your employer's group insurance provides coverage for one or two times your income, purchase the balance from another insurer.

Best insurance policies:

  • Renewable term insurance policies provide insurance protection only.
  • Cash value insurance policies like whole life, universal life and variable life also build a kind of savings account that can be borrowed against during the term of the policy. The savings are available if you ever give up the policy.

Term insurance

Unless you're buying insurance as an investment or for tax advantages, you're better off with annual renewable term policy. The reason is that the renewable term's current premium rates are lower than those of any cash value policy. As a bonus, there is no penalty if you drop an annual renewable term policy.

For example, the annual premium for a 100,000 whole life policy costs a 35-year-old about 1,100 but the same amount of coverage with an annual renewable term policy costs 140. If the insured drops the whole life policy, the first-year premium difference is usually forfeited.

Unless your life insurance needs are temporary, buy an annual renewable term policy which is renewable to at least age 65 and convertible to a cash value policy to age 60. There are other types of term insurance, such as five-year term, but we don't find bargains in them.

Beware, agents don't want to sell you renewable term because they can make 5 to 10 times as much in commissions on cash value life insurance policies.

Cash value insurance

If you want to use your life insurance as an investment vehicle and plan to hold the policy for at least 10-15 years, buy a cash value policy. The advantages of a cash value policy over term insurance:

  • You can borrow against it after several years.
  • If you cash the policy in after 10-15 years, you receive your premiums plus interest.
  • Interest earned on the policy is tax free.

Riders on insurance

Riders on insurance policies are similar to options on a new car. You pay a premium for special coverage or advantages on your policy. Most riders are offered to you because their profit margins are high for the insurance companies. You should avoid most of them.

  • Waiver of premium is the most reasonable rider available. If you become permanently disabled, the insurance company waives premiums due after your disability has lasted six months. If you compare rates of these riders, make sure you compare like benefits. This is because the coverage stipulations can vary widely among policies, although prices are similar. Also, double check to make sure your disability insurance policy and waiver aren't redundant.
  • Accidental Death Benefit insures you for a higher benefit if you die in an accident than if you die of natural causes. This rider is incredibly overpriced and senseless. The breadwinner should already be covered sufficiently with seven times his or her annual salary.
  • Cost of Living Riders increase your death benefit on annual renewable term policies to reflect rises in Consumer Price Index. The drawback is you pay a hefty premium for the extra coverage. It is better to buy more coverage now and let inflation catch up.
  • Guaranteed Insurability Riders allows the purchase of additional amounts of whole life insurance without evidence of insurability. The premium for this rider, which becomes useful only if you become ill or take on a hazardous job, is too high. Once again, it is better to buy more coverage in anticipation that your financial success will cause your life insurance needs to increase as you get older.
  • Revertible or Re-Entry Term annual renewable term policies enable you to reduce your premium after a period of years, if you can pass the underwriting test again. The major drawback is that if you fail to pass, your rates are likely to jump.
  • Joint Life Annual Renewable Term pays off when the first of the two insured persons dies. Separate policies are more flexible. However, if the joint policy is cheaper than separate policies, it may be a good deal.
  • In purchasing a policy, if an extra premium is charged because of a medical condition, check out some other companies to see if they will give you more favorable treatment. Some companies may be more positive about your longevity.

    Seek new quotes on your policy from time to time. Annual renewable term rates are always changing. If a competitor's rates have gone down, ask your agent about lowering your premium next time you renew.

    Excerpt from: Book of Inside Information based on James Hunt, director of the National Insurance Consumer Organization and author of How to Save Money on Life Insurance.

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