Buying Life Insurance: Getting Good Coverage and a Good Deal

What Determines the Cost of Life Insurance?

  • The type of policy is an important determinant of insurance cost. Permanent policies (e.g., whole or universal) are more expensive than term insurance. Risk factors such as age, health, lifestyle, and family history are also significant. Your zip code, credit report, and criminal history can even have an impact on your insurance costs.
  • An insurance company's rating is another factor in determining insurance premiums; the higher a company's rating, the higher its premiums. Assessed by an impartial third-party, a company's rating measures its financial stability and overall security.
  • Read the company's cost disclosure form. It will give you a feel for how much you're likely to pay in premiums over time versus what the future payout will be. The cost disclosure form makes it easier to compare the cost of this insurance against other plans.

    How to Save Money on Life Insurance

  • Get at least three different quotes. By shopping around, you can save several hundred dollars a month. If you are insured through your employer, see if you can find a better deal on your own.
  • Be on the lookout for special premium discounts. Believe it or not, premiums can actually be lower for a $500,000 pay out than for $450,000 worth of coverage.
  • If possible, pay your premiums annually, instead of monthly or quarterly. Insurance companies will usually give you a discount for sparing them the extra administrative costs of more frequent billing.
  • Purchase insurance directly, without paying an agent's commission. This "no-load" insurance translates into lower premiums for the same amount of coverage and usually provides faster cash value growth. By forgoing the expertise of a licensed agent, however, you might end up purchasing insurance that's inappropriate for your needs. You also miss out on an agent's annual review of your policy and might not realize that your insurance needs have changed.
  • Be willing to change your lifestyle. Many companies charge up to 50% more to clients who smoke or are overweight.
  • If you have a whole policy with a cash value component, you can cancel the policy and collect the cash that's added up. If you cancel a term insurance policy, you will not get any money back. Bear in mind that you may have to pay a surrender fee, and there might be tax ramifications if you receive money. There are better options for investing your money, so don't use whole life insurance or cash value insurance as a forced savings method.

    How to Choose a Life Insurance Company

    Before purchasing insurance, visit the website of one of these rating agencies: A.M. Best, Standard & Poor’s, Moody’s Investors Service, and Fitch. If your company has a high rating, you can have peace of mind knowing the insurer is likely to be around to pay benefits to your loved ones.

    If your insurance company does happen to go bankrupt, your state's guaranty association will step in to help pay claims. Your state legislature determines what policies are protected and how much coverage the guarantor will provide. Your best safeguard is due diligence.

    Other Things to Know About Life Insurance

  • You should have at least enough life insurance to cover your burial. With this in mind, the minimum amount of life insurance you can typically buy is $5,000.
  • If you can't pay your monthly premium, call your insurance company immediately; they will likely be willing to work with you. Typically, there is a grace period of 30 days before the policy lapses for non-payment. Your policy will specify the terms for reinstatement.