Buying a life insurance policy is a big decision—and if you have a family relying on you, it’s a must-have. Although it may seem time consuming, confusing, and even morbid (it isn’t!) at first, it’s important that you and your spouse take time to understand the policy you’re buying and why you’re choosing that one. Here are 10 simple ways that can save you big money you need to know before you start this important part of your financial planning:
The first step in buying a life insurance policy is determining how much you need. This amount can vary dramatically from person to person, depending on things like current income, retirement savings, and your current debt load.
Life Insurance is a cornerstone of risk management in anyone’s personal finance strategy, so don’t rely on a quick calculation off of an online calculator to figure this number out. Ask a professional or you can speak with one of our qualified financial coaches who can help you determine exactly how much you need.
However, the Rule of 15 is a great place to start to quickly estimate how much of a policy you would need to provide a loved one with retirement income. It works like this:
John makes $100,000 per year.
Multiply John’s income by 15: $100,000 x 15 = $1,500,000
This tells us that John needs to buy a $1,500,000 policy to provide his wife with all the retirement income she needs to retire. How does this work?
$1,500,000 Policy x 5% annual return = $75,000/year in retirement income for John’s spouse.
The Rule of 15 is a great quick reference point, but what if John already had a fully-funded retirement account? A $1.5MM policy might be too much policy for him.
Once you know how much you need, only buy that amount or a little over (we’ll get into this a little more below). At the end of the day, a life insurance policy is meant to be a risk management tool, not an investment. There’s no reason to spend more on a policy than you need to.
Before shopping for a new policy, check and see what you already have.
We’ll use this information as a benchmark when shopping for new rates. However, remember that an imperfect policy is better than no policy, so don’t cancel your existing policy until a new policy is in place.
Unless you buy a guaranteed issue policy, one of the initial parts of buying an insurance policy is the underwriting process. This underwriting process primarily involves checking on your condition of health. Blood pressure, cholesterol levels, etc. The healthier you are, the better your rate will be.
Your doctor can help you with these tests ahead of time. They will test you your blood levels, and let you know what you need to do to get your improve your overall health. Once the insurance company has done their initial evaluation, their results get placed with the Medical Information Bureau (MIB), a “credit score” for your health. Once you’re in the MIB, every other insurance company will be able to see the results.
Rest assured, however, it is possible to get a medical re-evaluation if you had a temporary medical condition that you have recovered from, but it’s much easier to not have to deal with it from the beginning. Getting your health in order before applying for a policy can payoff dramatically in the long-run, especially on a term policy that you’ll pay 20 or more years for.
Shopping for the best price almost goes without saying, but still worth pointing out. Some companies offer discounts on other forms of insurance if you bundle multiple forms together. For example, if your car insurance provider also offers life insurance, they may be willing to offer you a discount on your entire policy if you work with them. Even if the cost associated with the life insurance is higher than with another company, the discounts provided to other policies may bring the effective cost down.
Make sure to balance the cost of a policy against the long-term financial strength of the company.
When and insurance company evaluates the risk of a policy, it’s usually in intervals of nice, even numbers. Numbers like $100K, $250K, $500K, etc.
Once you’ve determined how much insurance you need, you’ll probably get a number that’s not nice and even. When pricing out policies that fall between their underwritten amounts, an insurance agent will interpolate between the next higher and lower amount to determine where to price your policy. Depending on how this interpolation is done, you may be better off moving to the next higher interval to get cheaper or more efficient policy pricing.
Like we mentioned earlier, life insurance is a risk management product, not an investment product. Insurance companies view your policy in the same way. One way they can reduce their risk is to get paid annually instead of monthly.
This is a positive in their eyes first because it ensures that they will get paid for the insured period. Relying on a monthly payment means they have to maintain constant credit exposure to you, which extrapolated over thousands or millions of policy holders bears a real cost to the insurance provider. If you’re willing to pay your premium annually, this reduces their risk, and they may be willing to offer a slight premium discount.
This also helps the insurance provider because they can invest your money earlier and begin earning interest on your premium. Insurance companies rely heavily on investments to provide a source of income that they can use to pay policies. If they are able to invest your premiums today, the interest your premium will earn over that year will make the cost to provide that policy cheaper as well, and make the insurance provider more willing to provide you with a discount.
For most people term life insurance is the best choice when selecting the policy type, especially if you’re under 50. This is because term life insurance is very cheap, but comes with the downside of having zero value to the beneficiary unless the policy holder passes. This means that years of premiums are lost forever.
However, there are other types of permanent life policies that carry a cash value for the policy holder. We always encourage people to make sure that their term policy is convertible. When you get closer to retirement age, it starts making more sense to convert term life policies to a permanent life for different types of planning like pension planning. This way, you can recoup some of the value of the premiums you’ve paid.
Not all life insurance policies are created equal. The internet has made it easier than ever to compare policies to see which one is the best for you.
One place to check policies is with QualityTermLife.com (we have no affiliation with any of the companies we mention). It only takes a few seconds to check quotes, and doesn’t require contact information or a phone call to get quotes.
That said, you can get different quotes from different sites. So, it may be worth the time checking multiple sources to see where the best quote will come from. Here’s a few options to consider:
Now that you’ve found the perfect policy, don’t just chuck it in a drawer and forget about it for 20 years. Your financial situation can change over time, as does insurance providers risk models.
If you’ve had a recent life event that changes your financial situation, check and see if your existing policy still covers your new needs.
Even if nothing has changed, it never hurts to see if you fall into a better risk category at another insurance company every so often. You never know when circumstances will change that makes you their most desired customer.
No matter where you are there is always a positive change to be made. We’re here to help! Take time to talk to someone about your future and weigh out the information you receive. To help with this process you can register FREE informational webinar or book a FREE Session to talk about your financial goals with us!
What about you? What kind of life insurance policy do you have? What steps did you take to be sure that you were getting the best policy? What were your hesitations in the process? Did you face any serious obstacles when you were choosing a policy? We’d love to hear from you!
All the best,
p.s. If you don't know where to start the journey to financial independence and you want to get on track to budget, get out of debt and achieve goals NOW book a FREE strategy session today!
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