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While a large number of factors impact the cost of a life insurance policy, they essentially break down into two groups: the policy you choose and how you’re assessed by the insurer. Since it’s much more difficult to change how you are rated by an insurer (and can take years), choosing a cheaper policy that still fits your financial needs is often the best way to save money on life insurance. Certain policies are consistently less expensive, such as term life insurance, but can still be customized to fit your financial situation. Knowing a bit about what goes into pricing and the full set of products available can help to make sure you don’t overpay for the coverage you need. Most Affordable Life Insurance Policies Least Affordable Life Insurance Policies What Else Goes into the Cost of Life Insurance? Most Affordable Life Insurance Policies While life insurance rates will vary according to your particular health and risk profile, term policies are typically the least expensive form of coverage, since they only pay out if you die during a certain period of time (the “term” of the policy). However, if you are specifically looking for permanent insurance to make sure family members are able to cover costs associated with your passing, final expense insurance is an affordable option as well. Term Life Insurance Term life insurance offers coverage for coverage for a specified period and, if you pass during the policy’s term, the beneficiary will file a claim to receive the policy’s death benefit. It’s typically the cheapest life insurance product, as coverage isn’t permanent and you cannot borrow against the policy. On average, a 20-year level term policy with $500,000 face value would cost $277 per year for a 30-year old male in great health. When shopping for term life insurance, the key policy features which will impact premiums are the term length and death benefit. Term lengths can range from one year to 35 years, and your financial situation typically determines the appropriate length. For example, if you’ve just had a child and want to make sure their college tuition would be covered, you would probably choose a term of 20 to 25 years. Similarly, a policy’s death benefit can be customized (the amount can range from $50,000 to over $1 million) and should reflect your family’s financial needs if you passed. Read more about the types of term life insurance policy >>Final Expense Insurance Final expense insurance is typically a permanent insurance policy with a small face value (often $5,000 to $25,000) since it’s intended to cover limited expenses associated with your death. It’s often marketed to seniors but can be applicable if you’re younger as well since the average cost for a funeral is often around $10,000, an amount most families don’t have on hand in case of an emergency. Final expense insurance is distinct from similar-sounding products, like funeral insurance, in that the death benefit can be used however your beneficiary sees fit. For example, a child or spouse designated as your beneficiary could use the payout for your funeral, arranging travel for relatives, or even paying off a small loan. Funeral insurance, on the other hand, typically pays the death benefit to the funeral service provider to cover a predetermined set of costs associated with your burial, such as the casket and service. The average premium for a final expense policy was $711 in 2014, according to a survey by CSG Actuarial, an industry consulting group. When shopping for coverage, keep in mind that “final expense insurance” is offered by dozens of companies and how a policy works may change based upon the insurer, so we'd advise checking that a particular product aligns with your expectations before purchase. Least Affordable Life Insurance Policies Certain life insurance policies are consistently more expensive and, therefore, tend to be more heavily marketed. However, they’re often not the best option for the majority of people, so it’s important to understand whether they would actually make sense for your needs. Permanent Life Insurance There are several types of permanent life insurance, such as whole life insurance, universal life insurance, and variable life insurance. All these policies are significantly more expensive, easily 10 times the cost of term insurance, because they offer lifetime coverage and have a cash value component. A policy’s cash value is essentially the amount of money you would receive if you surrendered the policy to the insurer, and this amount can be borrowed against or used to pay premiums. Depending on what type of permanent coverage you buy, the cash value can increase over time: At a guaranteed rate, in the case of whole life insurance. Either at the rate of the insurer’s portfolio or minimum guaranteed rate, in the case of universal life insurance. At a rate determined by the portfolio of sub-accounts (essentially, mutual funds) you choose to invest the money in, in the case of variable life insurance. With variable life insurance, the cash value can also decrease if your chosen portfolio performs poorly. A permanent policy is typically not the right fit if you’re looking to simply acquire financial coverage for your family in the case that you pass away, as term coverage will offer the same death benefit with much lower premiums. Given the high costs, these policies generally require that you take advantage of the cash value component of the account, or use the policy as a part of an estate plan, in order for the investment to make sense. As an example, say a 30-year old male was looking to purchase life insurance with a $500,000 death benefit in order to cover lost income to his family in the case that he passed. Over the course of 40 years, he could save $45,144 by getting term insurance, even though his premiums increased significantly when purchasing a new policy. 20-Year Term Policy Whole Life Policy Premium at Age 30 $277 $5,057 Premium at Age 50 $1,018 $5,057 Total Paid over 40 Years $15,540 $60,684 If you specifically want to purchase permanent life insurance, one of the simplest way to reduce costs and get the greatest value is to purchase a policy when you’re young and healthy. While you will pay premiums for a longer period of time, the annual premiums will be lower and the cash value may be significantly higher later in life as it has had additional years to grow with compound interest (assuming you don’t choose poor investments with a variable life insurance policy). Read more about the types of permanent life insurance policy >>No Medical Exam and Simplified Issue Life Insurance Any of the insurance policies above may be described as being “simplified issue” or “no medical exam”. These qualifiers don’t actually change how the policy works, though death benefits will often be restricted to less than $100,000. They just mean that the underwriting (approval) process is shortened in some way. While a shortened underwriting process may sound appealing, it means that the insurer has less information to tailor your rates and has to assume that you’re a higher risk, so premiums will typically by several times greater. If you’re looking for cheaper life insurance prices, we would recommend going through the full underwriting process. It will require that you complete an in-depth application, receive a medical exam (takes approximately 30 minutes and can be done at your work or home), and wait a few weeks while the insurer reviews everything. But, for example, if your premium for a 20-year term policy is only $250 as opposed to $500 for the no medical exam option, you would save $5,000 over the course of the policy. What Else Goes Into the Cost of Life Insurance? Once you’ve chosen a particular policy, life insurance premiums are basically determined by actuarial tables that insurers use to approximate your length of life. Since life insurance pays your beneficiary when you pass, insurers want to be as accurate as possible and will often ask about your: Age Gender Health and medical history History of tobacco use Family health and medical history Occupation and hobbies Driving history Credit history While some of these can’t be changed, such as your age and family history, if you know there is a particular reason an insurer would consider you high risk, you may be able to get cheaper life insurance rates by changing your habits or waiting a period of time. For example, insurers typically consider you a smoker if you have smoked in the past year, higher risk if you’ve smoked in the past 5 years, and will sometimes overlook a tobacco history if you haven’t smoked in over five years. So, if you quit smoking 4 years ago and don’t have a pressing need for coverage, waiting a year to apply may reduce your annual premiums and save you a significant amount over the length of the policy. Just note that it’s important to be honest when completing a life insurance application, even if answering the questions makes you uncomfortable or you know an answer will increase your premiums. Insurers typically have a period of a few years during which they can cancel coverage if they found you falsely responded to any underwriting questions, and you’ll forfeit all premiums paid up to that point.
