Life Insurance Cost - Is Cheapest Always Best?
Posted by Lenny Robbins on Fri, Oct 21, 2011 @ 03:45 AM
When buying life insurance, you want the same thing as you do with anything else you buy—the most value for your money.
But life insurance is one of the most complex—and one of the most important—purchases you’ll ever make. With the financial fate of your spouse, children, and other beneficiaries on the line, you’re asked to evaluate life insurance cost across a range of different insurance types, each of which offer different benefits.
The best value for you is not necessarily the best for someone else. It all depends on your situation and your objectives.
A Plan for Everyone
Life insurance cost varies depending on which type of insurance you choose, but keep in mind that cost isn’t just the premium. For example, tax benefits may decrease cost. Or you may have a lower premium because you chose not to insure yourself for your lifetime. It’s important to understand the different options and how they relate to total life insurance cost.
Term Life Insurance
This is the simplest, most-common, and usually cheapest of the choices. It’s the best value for most people. There are essentially only three things you need to consider: how much protection (death benefit) you’re buying, how long the coverage (term) is, and how much this will cost you.
But even within this relatively straightforward plan, there are choices to be made which impact your total life insurance cost. Do you want a level term policy that has fixed premiums? Or do you want a return of premium policy that refunds your premiums when the term ends? How important is the ability to convert to a permanent policy?
Perhaps you only need a one-year term with the option to renew each year? Or maybe you want mortgage term insurance, which has a declining death benefit (to match your declining mortgage)? (Did you know that level term is usually less expensive than mortgage term insurance? And the death benefit does not decrease!)
Your answers to these questions all have cost ramifications.
Whole Life Insurance
This type of policy guarantees coverage throughout your lifetime. It also involves a cash accumulation component that can benefit you if you need to access cash while you’re still alive. This type of insurance has higher premiums than term insurance in most cases, but for certain situations, this type of insurance can make sense.
Universal Life Insurance
Like a whole life policy, this is a permanent policy (coverage until you die), but it allows greater flexibility in how much premium you pay and offers more flexibility in structuring the policy. There are numerous options within this category, each with benefits and drawbacks. Determining the value you get in relation to cost depends on what your needs are. Universal life insurance is often the best option for estate planning.
The Bottom Line
Whatever type of insurance you choose, you can lower your life insurance costs by staying healthy. Life insurance cost goes up with health issues such as smoking or being overweight. Medical conditions may impact the cost of insurance as well.
You can get the lowest costs by consulting with a knowledgeable independent life insurance agent with access to multiple insurers. Life insurance cost can be hard to figure—an Internet calculator is rarely enough. You need someone who understands your specific situation, and from experience can explain your options to you. Someone who knows where to find the best deal for the protection you need.
Photo credit: David Trawin