With rates as low and competitive as they have ever been, now is as close to a buyers market in life insurance as you’ll see. Still, if you have a goal to be as efficient as possible with financial resources, curbing all costs and expenses is a priority, and buying life insurance is no different. While the cost of life insurance is predicated upon several factors over which we have little control, such as age, gender and health, there are many ways in which the overall cost can be reduced. It helps to have an understanding of how life insurers base their rates and the extent to which some of the factors can be influenced when applying for a policy.
Your health condition and history, including your family’s health history, is the biggest factor used to determine your rate. Life insurers have actuarially determined which health conditions present the greatest risk and will apply premium ratings or simply decline coverage accordingly. But even if you have some adverse conditions you should not be discouraged, as each company uses different standards in assessing risk and applying ratings, which is why it is important to look at several companies when applying for coverage. (For related reading, see: When to Update Your Life Insurance Beneficiaries.)
Many health factors can be controlled or modified in a way to earn a more favorable rating. The obvious one is smoking, which can increase your insurance cost by as much as 50%. Most insurers want you to be smoke-free for at least three years before they will issue a favorable rating. Weight is another big factor. Sometimes it could be just a matter of a couple of pounds that could push you into a higher rating class.
Many companies provide some underwriting guidelines on their websites so you can see which ratings class your height and weight will fit in to. Hypertension and cholesterol levels are determinants that you may also be able to influence by changing your diet or kicking up your exercise before applying.
By working on these measures prior to taking a medical exam for life insurance you could greatly influence the rating that is applied by the insurer. Additionally, you could take some steps right before your exam to improve your rating, such as fasting for a day which could help to lower your cholesterol. Or avoid alcohol, fatty foods, caffeine and sodium intake 24 hours before the exam. Also, it’s not a good idea to exercise too soon before an exam. Most importantly, get a good night’s sleep.
Life insurers also consider the way you live and how hard you live in their assessment. In addition to asking a lot of questions about your activities, hobbies and occupation, they will check your background including your credit and your driving record. Any indication that your lifestyle introduces additional risks to your health will generate a higher rating. If you have a lot of violations or accidents on your driving record you will pay a higher premium, so you may want to wait until some of them fall off your record. Lifestyle or hobby choices such as dangerous sports, driving motorcycles or scuba diving may lead to increased insurance costs. (For more, see: The Importance of Life Insurance for Women.)
How Much Life Insurance You Buy
One of the easiest ways to control your life insurance costs is to make sure you buy only what you need. Some people buy life insurance based on some general rule such as 10 times income. That’s not advisable because it is likely to lead to either insufficient coverage or excessive coverage. The only way to know exactly what you need is to do a thorough assessment of your family’s needs, calculating the cost to replace income, pay off debt and pay for future obligations.
Also, it is important to note that insurance premiums are often discounted at different coverage thresholds. For instance, a $1 million policy may cost less than a $850,000 policy due to a premium break at the million dollar threshold. You can find premium breaks at $250,000 and $500,000 thresholds with some insurers.
How You Pay for Life Insurance
Many people pay for their life insurance policy through monthly payments or automatic drafts from their bank account. While this is certainly a convenient and cash flow-friendly way to pay, most insurers charge a fee for this privilege. You can lower your annual life insurance cost by as much as 10% by paying in one annual installment. (For more, see: Understanding Different Types of Life Insurance.)
Shop and Compare
Life insurance rates have come down sharply in the last decade and competition among life insurance carriers has grown fierce, especially with the ability to shop and compare online. It’s easy to compare premiums between dozens of carriers. But, the premium is only one, and perhaps the least important point of comparison. Just because one company’s premium is lower than another based on your age and general health, the underwriting standards can vary widely between companies. A company's financial stability is also important to consider. One company can offer a better standard premium rate, but it may be more difficult to qualify for it based on their underwriting guidelines or they may have a low credit rating. Some companies may promote an extremely competitive “super preferred” premium rate, yet less than 1% of applicants can qualify.
Many life insurance companies view such things as height-weight ratios, hypertension, cholesterol and other maladies differently. It could be a very arduous process to search, review and understand how each company addresses these underwriting issues. Your best course of action might be to work with a trusted insurance professional who has access to a wide range of different carriers. They will know which carriers would be the best to work with based on your particular needs or health condition. (For more, see: Estate Planning for Beginners, Part One.)