As far as securing your financial safety net goes, term life insurance is invaluable, but it isn’t free. You still have to find room in your budget to pay your premium each month. The good news is that, statistically speaking, you’re probably overestimating the cost of a term life insurance policy by a good bit.
A 2016 LIMRA survey showed that Americans overestimated the cost of a 30-year/$250,000 term life insurance policy by more than double. That means that whatever you think a life insurance policy would cost you, you can cut that in half. Seems a lot more affordable now, doesn’t it?
Well, I’ve got more good news: term life insurance premiums might be getting even lower in 2017. Thanks to a few changes in regulations and how life insurance companies handle their money, consumers might be seeing savings. Here’s what it can mean for you.
Why are term life insurance premiums lowering?
Your individual term life insurance rate is based on a lot of things:
The kind of policy you want. Typically, the higher and longer-term the coverage, the more you’ll pay.
Most of these will be worked out during the underwriting process, the company will classify you based on how risky you are to insure, and everyone will get their very own policy price.
But there’s also some work going on behind the scenes. One way that life insurers ensure that they can pay out policies and keep their end of the bargain is through reserve ratios. Basically, a company has to keep enough capital on hand to cover their obligations to policyholders. This amount is set at the state level with government insurance departments around the country.
That’s the part that’s changing for insurers and, ultimately, customers.
For a long time, the reserve rules have been pretty cookie cutter, and insurers found themselves keeping more cash in stock than they actually needed. Starting January 1, 2017, insurers in 46 states adopted a "principle-based reserving." It gets rid of "formulaic" calculations and is more dynamic, acting to "reduc[e] reserves that are too high for some products and increas[e] reserves that are too low for other products." This gives insurers the ability to be more flexible and accurate with their reserves. For example, term life insurance policies require a lower reserve than whole and universal life policies, so term life customers in particular can expect to see a big drop in premiums.
According to the National Association of Insurance Commissioners (NAIC), companies are going to reduce their reserves by 38-64% and premiums can drop by an average of 2.6%, but up to 15% for some people.
It’s important to keep in mind that changing reserve requirements won’t make life insurance any less safe for consumers; there are a number of other safeguards in place that protect consumers in the event of an insurer going bankrupt.
Will my term life insurance premiums lower?
Maybe! Next section.
Okay, real answer: Maybe!
There are a few different factors that will play into whether or not your term life insurance premiums go down. One is if you’re in a state that is adopting principle-based reserving. Then, obviously, your insurer of choice has to decide (or have the fiscal ability) to change their pricing structure.
The good news is that some experts expect a lowering of prices across the board. The NAIC predicts that principle-based reserving will affect almost 86% of the US life insurance market, so there’s a good chance that you can get in on the savings. Sure, you could have a company that would prefer to hoard their savings, but then they’d be competing with the insurers who are lowering their prices, and they may decide it’s easier to give in than fight that battle.
You also have to keep in mind that these are for new policies only. Life insurance companies won’t retroactively lower your premium. But that doesn’t mean you can’t benefit. Even if you already have a life insurance policy, maybe you’ve been thinking about getting one for your spouse, or for your child who is graduating college with a mountain of student loans you’ve cosigned. Or it could be that you want to buy an additional policy to stagger them and make sure you’re always protected.
So if you haven’t bought a term life insurance policy yet, there’s never been a better time. But if you have…well, it doesn’t hurt to look, right?
Tips for getting an affordable term life insurance policy
The introduction of principle-based reserves marks a great time to buy life insurance. But you don’t have to be dependent on regulation changes to get an affordable term life insurance policy. Here are some things you can do to start saving today.
Figure out how much life insurance coverage you need. The last thing you want to do is pay for a policy that has more coverage or lasts longer than you need it to. Look at your current expenses – from your day-to-day to past debts you’re still paying off – and your anticipated future expenses, like a home, college for your children, and retirement, and use that to calculate how much life insurance you actually need. You probably don’t need a $10 million policy, and you’ll save a bundle by avoiding one.
Use the ladder strategy. Your life insurance needs will grow as your circle of dependents do, but eventually your expenses will go back down. You can avoid paying for more coverage than you need with the ladder strategy. With this method, you buy multiple policies, staggering their coverage amount and term lengths so that you aren’t stuck with a policy that’s more than you need once your mortgage is paid off and the kids are out of the house.
Be the best that you can be. Term life insurance premiums increase by 8-10% every year you don’t buy. If you buy while you’re younger, you can save a lot of money. Your policy price is also based on your health, so losing weight, quitting smoking, and generally getting into shape can go a long way.
Compare policies. Not all life insurance companies are created equal. You comparison shop for everything from televisions to flights, so why would you buy the first life insurance policy you come across? Compare policies side-by-side so you know you’re getting the best deal.
Buying a term life insurance policy as soon as possible to protect your family is key, and there’s a lot you can do on your own to make sure a life insurance policy fits into your budget. Still, it’s nice to know that there are outside forces like principle-based reserving that can help make peace of mind more affordable than ever.