Find out what you need to know before making this important purchase.
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Buying life insurance is a big decision. After all, you’re planning for your loved ones’ financial wellbeing for the next few decades. You have enough to think about without having to wonder if someone’s trying to sell you something you don’t need.
When you’re shopping for life insurance, you want the best deal for the best coverage. But is that always what you’re getting? Maybe not, if you’re not able to see all of the options available to you to compare policies. You may be overpaying or being sold on expensive add-ons that aren’t right for your situation.
To make sure you’re getting the right life insurance policy at the right price, watch out for these five tactics that some brokers and agents may use.
Discounted rates aren’t always what they seem, so compare policies to make sure you’re really getting the best rates
Use an independent broker that works with multiple carriers and isn’t biased toward a single company
Get only the coverage you need and think carefully about expensive extras
Problem: When you’re presented with a “special” rate that appears to be discounted, it’s only natural to assume you’re saving some cash and making the right choice. But check the fine print associated with the offer. Sometimes, an advertised discount is actually applied to a life insurance policy that’s more expensive in the first place. If you were to review all of your options, you might end up with a better deal if you get a “non-discounted” rate from a different company that’s attached to a less expensive policy.
Solution: The only way to guarantee you get the best possible rate and policy is to choose an independent broker who works with multiple carriers and does not have a vested interest when it comes to pushing a particular company. You should also make sure you’re seeing available options up front and are able to compare policies and rates for yourself.
Problem: As you move through the life insurance shopping process, you will soon learn about health classifications and how they impact your premiums.
Preferred Plus: Also known as Preferred Elite, Preferred Best, Super Preferred, or Preferred Select, this is the most desirable classification.
Preferred. Considered the second-best classification, but you’re still in a good spot price-wise.
Standard Plus: This classification means you are overall healthy but you might have a few small medical or lifestyle factors.
Standard: If you fall into the Standard category, it likely means you have a few health issues, a complicated family medical history, and/or are potentially overweight.
Substandard: If you have serious health issues you may be given a Substandard classification and your monthly premiums will be more expensive.
While it might seem like a no-brainer that the best classification will get you the best rate, companies charge different amounts for the same rating. So, it’s actually possible that the Preferred rate at one company will be cheaper than the Preferred Plus rate at another company.
|Company A||Preferred Plus||$33|
Another quirk of the life insurance shopping process is that companies rate health conditions differently; there is no such thing as uniform pricing for every type of lifestyle factor or medical issue. For example, an overall healthy 30-year-old male with mild depression might get a Preferred Plus classification with Company X but Company Y could give him a Standard classification.
|Health Condition||Classification||Monthly Premiums|
|Mild depression||Preferred Plus||$19.75|
Solution: There’s a sage piece of advice that often pops up in the business world: Never say yes to the first offer. In the world of insurance, you don’t have to go it alone. A reliable insurance broker will shop a policy around to multiple carriers to confirm that you are getting the best health rating and rate. One caveat to keep in mind: you’re only able to confirm the final health rating and rate after you’ve gone through the underwriting process, which typically consists of a medical exam and/or providing your medical records and prescription history. Once that information is in, a skilled broker will have the expertise to advocate for you every step of the way.
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Problem: When you are shopping for the right policy you might encounter the term “accidental death insurance” which is often advertised as a perfectly suitable alternative to life insurance. In reality, there are important distinctions between the two types of coverage that are worth paying attention to.
Accidental death and dismemberment insurance will cover you if you die in an accident or lose a limb or digit in an accident, but it doesn’t cover death by, for instance, illness or heart attack. Life insurance is far more robust and will provide you with a wider scope of coverage. Younger insurance shoppers sometimes opt for AD&D insurance because they think they don’t need life insurance yet but waiting to make the switch could be costly.
Buying life insurance when you’re young is actually a great idea because you’re protecting yourself and your future family. Did you know that the cost of life insurance increases 8-10% every year you delay buying it? Purchasing a $250,000 policy will cost $15.90/month for a 25-year-old man and $13.15/month for a 25-year-old woman. If you wait 20 years, that same policy will cost a 45-year-old man $32.71/month and a 45-year-old woman $26.14/month. Double the amount you could have paid in your 20s!
Solution: Resist the temptation to purchase accidental death insurance, even if you think it’s more cost-effective. Instead, we suggest applying for term life insurance. If you’re concerned about having coverage during the application process for a term policy, most carriers will allow you to add temporary life insurance to your application which pays out in the event you pass away during the application process. This coverage doesn’t end up costing any extra if you ultimately get the policy, as any money paid upfront (usually one month’s premium) will be applied to your first official premium payment. Since states have their own unique rules for these policies, ask your agent to find out about any exclusions or limits. Don’t delay shopping around for life insurance, even if you think you’re too young to worry about it now. The longer you wait, the more it will cost you.
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Problem: Term life insurance, like the name suggests, is meant to cover you for a set term or length of time and permanent life insurance provides lifelong coverage along with a cash value that acts similarly to an investment vehicle. Even though it’s permanent, it also costs 6 to 10 times more than term life, which needs to be considered when you look at the big picture.
A term life policy may get you more coverage for less money. Moreover, for the vast majority of people who continue to build wealth, pay off debt, and have fewer dependents, they won’t need insurance for their entire life so it becomes an unnecessary expense.
Solution: Work with an independent broker who takes your financial needs into account and only recommends coverage that’s suitable for your specific situation.
It’s also generally not recommended to use your insurance coverage as an investment tool. To hit your long-term financial goals, you should speak to a tax or financial advisor who can help you determine the best areas to invest in.
Problem: Return of premium and other riders often add unnecessary expenses without the benefits to make it worthwhile.
Like whole life insurance, return of premium life insurance is more expensive than a basic term life policy. The appeal of return of premium coverage is that you get your money back when you’re at or near retirement age. But if you are on a tight budget and can’t afford to pay more each month, there’s no reason why you can’t just get a term life policy and invest the money somewhere else.
Adding riders like disability, critical illness, or long-term care protection is less cost-effective than buying full standalone policies instead. If you are looking at a lower death benefit or term length with more riders or a higher death benefit or term length with fewer riders, the latter is more beneficial. A lot of the riders are very specific in what they cover.
Another thing to consider: If you’re relying on life insurance riders for other types of protection, they’re tied to that policy. If your life insurance policy lapses or the term ends, you’ll also lose your long-term care coverage, for instance. Having standalone policies is not only usually more cost-effective, but it also gives you more flexibility.
Solution: Opt for standard term life coverage if you don’t have room in your budget for the added monthly expense of riders. Consider getting individual policies instead of tacking on riders to your insurance plan since it’s usually a better value overall.
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