Two Tips When Buying Life Insurance
Obvious ways to reduce the cost of insurance are to be young, healthy, not be involved in risky activities, choose companies with good products and rates, etc., but some of those things are only partially in your control. Fortunately, the two tips in this article are applicable to a wide range of people and scenarios, including those who don’t qualify for the best rates. Some people are never going to qualify for “cheap” insurance, but they can still get the best bang for their buck.
1. Pay attention to expense “bands” or breakpoints. When insurance companies factor expenses into their pricing structure, they usually will reduce per-unit expenses for larger face amounts. It’s analogous to buying in bulk. Of course, the amount of insurance you purchase should be based on how much you need, so you don’t just go looking for the cheapest per-unit price (e.g. if you only need $500,000, you wouldn’t go buy $1,000,000 of coverage just because it’s less than twice the price). Common breakpoints are $250,000, $500,000, and $1,000,000, but this varies by company and type of policy.
So, how can you actually make this information useful for you? The easiest way to demonstrate this is with an example. First, we’ll use a 35 year old man in perfect health who needs $475,000 worth of coverage for 20 years. For a particular company, his premium would be $23.28 per month. In this case, the policy has an expense breakpoint at $500,000. $500,000 of coverage is $23.76. So the additional $25,000 in coverage is only 48 cents per month. Suppose his needs had instead been $495,000. The premium would have been $24.02, which is even more than the premium for $500,000 of coverage.
So if your insurance needs fall somewhere near an expense breakpoint, it is a good idea to look at the prices at the breakpoint. You could get more insurance for nominally more premium, or sometimes even less premium. For someone who doesn’t qualify for the best rates, the differences will typically be larger since the premiums are larger.
This applies mostly to term insurance, but permanent policies have expense breakpoints too. In that case, the lower expenses will enable cash value to accumulate more quickly and efficiently. If your insurance needs are not near an expense breakpoint (e.g. you need $750,000, but breakpoints are at $500,000 and $1,000,000), this probably won’t help you much, although you could try to find a company that has breakpoints near your coverage needs.
2. Use quoting software to your advantage. This tip applies mostly to term insurance, but can also be used on permanent products that have a death benefit focus (e.g. on a guaranteed universal life policy). Typically, people either want to know how much coverage they can get for a specified premium or how much it will cost them for a specified death benefit. So, you plug one of those inputs to quoting software, a number comes out, and for most people who use the software that’s the end of it. But depending on the company you’re quoting and how they do their rounding, you might be able to get more coverage for the same premium. If this doesn’t make sense, it will with an example.
Using the same 35 year old from the first example, the software I’m using for this example outputs $23.76 when you enter a death benefit of $500,000. But if you increase the death benefit to $500,134, the software still outputs $23.76 (if you go up to $500,135, it increases to $23.77). So, if you know how to take advantage of how the software rounds, you can get an additional $134 of insurance without paying a higher premium. This isn’t a ton, but it’s getting something for nothing. The good thing about this tip is that it can apply to any coverage amount or any person’s health status.