There’s an old joke: “If I was walking down the street and saw my insurance agent, I’d cross the road so I wouldn’t have to talk to him.”
I handle life insurance as part of my financial-planning practice and I get it. People don’t like insurance. Most don’t understand it, and certainly don’t like to pay for it.
Agents’ reputations are often justified. Many will try to oversell. However, there are many good, well intentioned agents who will advise you properly.
You can do a lot to reduce your life insurance costs. This is how.
Buy inexpensive term insurance
Term insurance covers you for a specific period of time, whereas whole life insurance covers you for life. Term insurance is generally the best product. I’m not saying that some agents will push whole life insurance because of higher commissions, however…. Whole life insurance can easily cost double or triple the cost of term insurance.
In their fine book, The Facts of Life, authors Paul Grimes and Susan Goldberg discuss the concept of buying cheaper term insurance and investing the difference. “To follow that advice, buy (usually) less expensive term insurance and invest the amount you’ve saved in premium costs. That way, you’ve taken advantage of both lower insurance costs and the benefits of investing.”
Use an independent agent
A non-independent agent won’t have the widest product selection and rates are generally higher. These agents can only use their company’s products (much like bank financial advisors who can only use the bank’s products). Ask to see a rate survey, which will include quotes from a couple dozen companies.
Avoid riders, too much insurance
Your agent may try to tack on unnecessary insurance – either as riders or by overselling the amount of insurance. Again, the agent makes more money. Some riders (such as return-of-premium, cost-of-living or child riders) may be useful. Ask why it’s being recommended and see if it makes sense. Most are unnecessary.
Don’t buy insurance too early
Generally, the younger and healthier you are, the cheaper your insurance. Life insurance is very inexpensive for a 30-year-old, but it’s only a good deal if you need it. For example, if you don’t own a home, are single and have no kids, maybe you don’t need insurance.
There is a risk in waiting, because future heath changes can affect your insurability. For example, if you buy guaranteed-renewable life insurance for a 17-year-old child, the child will always have that insurance, despite future changes in health.
Generally, it costs more to have two $500,000 policies than one $1-million policy (largely because of rate “banding”). If you have a policy and need more insurance (maybe you’ve had more children), consider combining policies. Ask for quotes on both options and buy what makes sense.
Buy your home and auto insurance from one place and personal insurance elsewhere. However, products exist that combine life, disability and critical illness insurance (generally at a significant saving over buying them individually).
Avoid mortgage insurance
You can buy bank mortgage insurance, but you shouldn’t. It’s expensive and, because of how it’s underwritten, it doesn’t always pay when there is a death or disability. Instead, include your mortgage coverage in your life (and disability) insurance plan. For example, if you need $600,000 of life insurance plus coverage for a $200,000 mortgage, consider combining them. Google CBC Marketplace In Denial for an expose on mortgage insurance.
Make lifestyle changes
A smoker’s insurance rates can double or triple those of a non-smoker. If you’re a smoker, you can apply for non-smoker rates after a year of not smoking. This may be the biggest thing you can do to reduce rates. Losing weight can also be a great cost saver.
So, although we don’t like to buy insurance (it’s a necessary part of any financial plan), you can do a lot to reduce your insurance costs.