The absolute best and cheapest way to buy a life insurance policy is to know the exact date of your death, or to know the exact date you’ll be diagnosed with an illness which will make you uninsurable. Make your appointment with your insurance carrier about 1 month before that date (to allow time for underwriting to approve your policy) and time it just right so that the policy is issued the day before either of these two events.
For the rest of us who don’t know, it’s a bit more of a guessing game, but it does help to get as far as possible in front of these events so that your insurance cost remains as low as possible. Other factors, such as permanent vs. term, the amount of insurance applied for, duration of coverage, age, sex, smoker/non-smoker, disease state play into the underwriting process as well.
Check With Your Employer First
If your employer offers voluntary group life insurance and you are unhealthy or otherwise uninsurable (or a heavy premium load would be placed on your policy), definitely apply for as much of that coverage as you can. Those policies come with what’s known as a Guaranteed Issue (GI) Amount, which means there’s an threshold amount of coverage under which you won’t have to go through medical underwriting. That means you could get $200,000 of coverage (for example, your employer’s plan could be more or less) without having to be medically fit.
This is a big deal for someone with chronic diseases such as diabetes since you may be denied coverage under an individual policy. On the other hand, if you’re a healthy individual, you’ll most likely be best in an individual policy since there’s a natural gravitation by poorer risks to these types of employer plans (as I’ve advised here).
Another plus if you go down this road with your employer is that these policies usually contain portability or conversion privileges, which means that you can take the coverage with you when you leave the company. Of course, you still have to continue paying the premium, but it may still be less than you’d pay if you purchased an individual policy.
Your employer doesn’t offer this? Let them know it is NO COST to them, and give them this link to apply for a policy. You’ll be happy. Your employer will be happy to offer an additional benefit with no cost. The heavens will open as a chorus of Hallelujah is sung by the angels from on high.
Determine How Much You Need
There are some very basic guidelines out there based on age and other factors, indicating you should carry 5 times, 10 times, 20 times, your annual salary. But these methods don’t account for personal savings, actual short term debt requiring coverage, whether or not you have a spouse or child(ren) to cover, etc. This is why any good life insurance rep will perform a Life Insurance Needs Analysis, also known as a Financial Needs Analysis.
This needs based approach is much more accurate, although you will have to work with your agent to make sure you can justify a need that is above the multiple of salary approach as this is still used as an underwriting guideline to prevent people from being overinsured. It’s rare that you would ever be above the multiple of salary guidelines, but as long as it can be explained, underwriting should be flexible to a point.
The needs to consider include any immediate needs at the time of death, such as:
- Final illness expenses
- Burial costs
- Estate taxes
- Funds for a readjustment period
- To finance a move
- To provide time for family members to find a job
Other needs to consider include ongoing expenses, such as:
- Monthly bills and expenses
- Day-care costs
- College tuition
- Retirement
Once you have this data compiled, fill out a Life Insurance Needs Analysis.
Next, Determine What Type of Life Insurance You Need
Term insurance provides coverage for a specific period of time. It pays a benefit only if you die during the term. Some term insurance policies can be renewed when you reach the end of the specific period. Others give you the ability to reenter. The premium rates increase at each renewal date or each reentry. Many policies require that evidence of insurability be furnished at reentry for you to qualify for the lowest available rates.
Initially, premiums are generally lower than those for permanent insurance, allowing you to buy higher levels of coverage at a younger age, when the need is often the greatest. This is the least expensive type of policy and fits 99.9% of all situations. The permanent policy choices that follow are best for estate planning or business buy sell agreements.
Whole Life is the most common type of permanent insurance. The premiums for a whole life policy must be paid as scheduled in the amount indicated in the policy. These premium amounts remain constant over the life of the policy. The death benefit and cash value are guaranteed as stated in the policy if premiums are paid when due and there are no loans or withdrawals outstanding at the insured’s death. Quite often dividends may be credited to this type of policy.
Universal Life is a variation of permanent insurance allows you, after your initial premium payment, to pay premiums at any time, in virtually any amount, subject to certain minimums and maximums. You can also increase or reduce the amount of the death benefit more easily than under a traditional whole life policy. Typically, current interest rates are credited to the cash value in this type of policy.
Determine The Length of Time You Need Coverage (Term Only)
This should be a byproduct of the Life Insurance Needs Analysis if you are moving forward with term coverage, and should be designed to cover the maximum amount of need you’ll have over the course of the term. Ideally, you should time the term end date to correspond as closely as possible to the end of the need, but you may find that going for the maximum term of 30 years (for most companies) doesn’t price you out of the ballpark for what fits your budget. In that case, I would recommend purchasing 30 years at the maximum forseeable need, and reducing the coverage amount if your need drops during the term. Most companies will allow reduction of the coverage amount with no underwriting, but none will allow an increase without additional underwriting.
Example, you’re 30 years old and just purchased a home with a 30 year mortgage. You have 1 child, but know that you’d like to have a second. You should have a 30 year term life insurance policy with a coverage amount equal to estimated day care costs, college tuition costs, and a fund to pay off the mortgage. In 25 years, the mortgage balance should be reduced to 10-15% of what it is today (although taxes will be higher), and your college funding liability should have passed. Hopefully your daycare liability has also passed, although that all depends on how mature your 24 year old is. At this point you should also have set aside a retirement fund and all other liabilities should be minimal, reducing your needed life insurance amount. You could reduce your coverage amount to cover your remaining liabilities in the event of your death, convert the policy to a permanent policy to fund burial costs, final illness, estate taxes, etc., or cancel the policy if you have enough to cover these needs.
Finally, Request a Quote or Consultation
Your agent should give you some guidance regarding price “breakpoints” that are in all carrier’s pricing structures. What I mean by that is that all coverage is priced in $1,000 units, and at certain points, you’ll get a volume discount. So, for coverage up to $249,000, you may pay $0.25 per $1,000 of coverage per month, or $62.25 per month. There may be a breakpoint in the pricing for policies over $250,000, reducing the cost on all premium to $0.22 per $1,000 per month, or $55.00 per month for an extra $1,000 of coverage. Or to look at it another way, you could buy $282,000 of coverage for the same price as $249,000.
You should also request the independent ratings for the insurance companies you’re being quoted. There are dozens of very highly rated companies, and a handful of low rated companies, just be sure you aren’t being quoted one of these. All life insurance companies determine their pricing by looking at a standard mortality/morbidity table, so the pricing from one company to another shouldn’t vary by that much if they’re using the same underwriting methodologies. Some companies lump all risks into one pool to attract policyholders who are less likely to make it through the underwriting process without having an extra load assessed, meaning that if you’re young and healthy, you’ll be overpaying by buying a policy there. I quote many of my clients via NACOLAH after having researched the prices vs. the ratings, and found that NACOLAH is one of the highest rated, and also one of the least expensive.
Conclusion
The most important thing to remember if you’re shopping for replacement coverage for an existing policy is to NEVER cancel any existing policy until you have replacement coverage secured. That means you need to have a contract in your hand stating the effective date of coverage, not the date you apply for coverage. This will mean you’ll technically be paying two companies for a month or two, but paying that expense for a short time is worth the possible alternative of being declined by the quoting carrier, and having no coverage because you canceled the existing policy. Not only will you have been declined by that quoting carrier, but you’ll likely be declined by most other carriers for the same issue, or you’ll be paying a much higher premium.
{ 1 comment }