Guide to Saving Money on Life Insurance

Guide to Saving Money on Life Insurance

To save money on life insurance you need to determine several things.  The first factor that most people consider is cost, but cost alone should not determine your final decision.  You should also consider whether or not you actually need an agent at all, since s/he is merely a "middle-man" and their commission is part of the premium you'll be paying.  In fact, one of the reasons you're probably reading this is because you believe the stereotypical portrait of the pushy, slick-talking insurance person who leaves their ethics at home when they go out on a call.  So if you can avoid that hassle, why wouldn't you?

Regardless of what an agent may tell you, there are only two types of life insurance; term, the least expensive type and cash value, the most expensive type. Term insurance is available in two basic forms, level and decreasing; cash value insurance is any kind of life insurance with some type of "savings" plan attached to it.  What some people don't realize is, the purpose of life insurance is to replace an income that is no longer coming in; but as you get older, you generally save money for retirement and other goals so your need for insurance decreases because you've accumulated more savings.  Not to mention the house getting paid off and the kids moving out on their own.  So, as savings increase, the need for insurance decreases, don't let anyone try to convince you otherwise.

Now, how much coverage do you need?  A lot of people will say they want it to cover burial and other final expenses, there's $15,000 roughly; then you may or may not want to pay off your mortgage, send your children to college, and provide additional money for retirement.  All of a sudden that $15,000 jumps up to anywhere from $150,000 to $500,.000 or more.  How are you going to afford it?  We'll get to that in a moment.

To decide how much insurance you need and how long you are going to need it for is basically simple.  Some experts recommend three to ten times your annual salary, but that's a thumbnail figure; you can figure out what you need, by what you want your insurance to cover (mortgage, cars, college, retirement et cetera).  Then, you want to determine how long you're going to need it, and that's a bit more challenging, but not overly difficult either.  Let's use the television family, The Simpsons, as an example.

Homer is 37, he's worked at the power plant for 15 years, has a $50,000 life insurance policy from his company (equal to his salary) and he's got almost $100,000 in his company pension program.  They match his $2,000 annual contribution dollar for dollar and it's invested in several stock mutual funds with all the dividends and capital gains automatically reinvested.  He also has a mutual fund savings program for the kid's college that he puts $100/mth. into and all the profits are reinvested just like at work.  Unfortunately, he also has a second mortgage and the house won't be paid off for another twenty years.  His youngest, Maggie, is only three years old, so it'll be at least fifteen years before she's on her own.  As we all know, Homer is the bread winner and Marge is a stay at home Mom who couldn't be replaced by both of her sisters.

If Homer died tomorrow his income needs to be replaced until Maggie is grown up, roughly 15 years; however, we don't just multiply 15 x 50,000 and then toss the $40,000 mortgage on top of that for a total of $790,000.  We have to subtract his coverage from work ($50,000), his pension ($100,000), and then reduce that $50,000 income to about $30,000 because he's not around to eat all that food any longer.  Now we're down to roughly $30,000 that needs to be replaced for roughly 15 years, that's $450,000; minus the $150,000 insurance and pension for a total of $300,000 not quite so shocking, but still a big chunk of change.  What's the solution?

In Homer's case, he wants $200,000 of 10 year level term insurance with a $100,000 decreasing term rider. That will replace his income and pay off the mortgage since Marge is smart enough to invest the lump sum and use the interest to fund the kids college savings program. Since Homer probably won't die, he'll review his coverage every few years and decrease the face amount of his level term by $20,000 a year. Since his savings have more than doubled in 10 years he can drop the level term (which he's been reducing every few years, thus reducing his costs each time) and the decreasing term rider can be made into a 5, 10 or 15 year level term policy with a lower face amount of coverage and subsequently lower out of pocket costs.

Everyone's situation is different and you may want to do more reading or even talk to a few different agents from different companies just to listen to their recommendations.  Remember, your goal is to become self-insured by having cash instead of insurance.  The easiest way to accomplish that goal is to purchase term life insurance, which provides the most coverage for the least amount of money; and, systematically invest a set amount of money each month into an investment vehicle that you're comfortable with and which returns better rates than your average passbook savings account.

To check prices over the Internet, http://www.intelliquote.com/ is a good place to start.  Once you've decided on the policy you want and you have quotes from various different companies, then you need to check the company's financial stability.  A.M. Best is the oldest, most trusted insurance rating company around and they've been rating insurers for over 100 years.  They publish a rate book every year, the A.M. Best Flitcraft, which compares the price of insurance, in cost per thousand increments, from all the licensed companies in the United States.  Their home page is: http://www.ambest.com
and their web page for checking the financial stability ratings for various insurers is: http://www3.ambest.com/ratings/advanced.asp

It's a jungle out there, but now you've got a guide as well as your own sharpened mind, so you should be able to hack you way though the legion of misleading deceptions that will attempt to ensnare you along your way to financial freedom.