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Term life insurance might be a necessary evil, but it doesn’t have to be an expensive one. The advent of online shopping services makes it easier for you to compare competing providers and find the best deal for yourself. In addition to shopping between providers, you can also impact your rates by eliminating unnecessary policy options and by taking better care of yourself to improve your health rating.
Insurance companies can charge wildly different rates for similar coverage. For example, as of July 2, a 42-year-old Midwestern male in excellent health could pay as little as $126.42 or as much as $164.80 per month for a 20-year $1.5 million term policy from insurers offering a "preferred plus" health category. That same person could pay as much as $293.55 per month to an insurer not offering such a category. All three quotes were obtained from insurers with A++ ratings. Shopping around can reduce your premiums.
Insurers set rates based on whether they think they will have to pay, which is why age determines your rate: The younger you are, the less likely you are to die. Insurers also place you in a “risk class” on the basis of your health. If you’re extremely healthy and don’t smoke, you can qualify for preferred plus status, but if you have health problems, you could end up with a standard rating. While you usually can’t change your health status overnight, if you’ve significantly improved your health, requoting your insurance could result in significant savings. For example, the same insurer that would charge $152.85 for a 20-year $1.5 million policy for a 42-year-old non-smoker in excellent health increases the rate to $245.24 for a person in the regular or standard category. Definitions of categories vary by insurer, so the same person could be placed in the standard category with one carrier and in the preferred category with another. This is another reason that shopping around is wise.
If your policy has features that you won’t use, switching to one without that benefit can save you additional money. For example, a term life insurance policy might give you the right to convert it to a whole life policy that doesn’t expire. If you don’t plan to convert to a whole life policy, paying for convertibility is a waste of money. For example, a 47-year-old woman in California in the preferred risk class could pay $130.47 per month for a 15-year $1 million policy that is convertible and $115.02 for the same policy that isn’t.
For a return-of-premium policy, you pay a much higher monthly premium, but if your policy ends and you’re still alive, you get all of your payments back. In essence, having such a policy is like a paying into a bank account that pays zero percent interest and getting a free term policy thrown in. The problem with return-of-premium insurance is that you may do better by just saving the extra money you’d pay for the insurance yourself. Also, the right to get your money back if you cancel your policy early varies by insurer.
You can also save money by adjusting the amount of insurance that you carry and the length of time for which you carry it. As you age, if you pay down debt and your children move out and finish college, your expenses drop. This can lead to you needing less term life insurance to cover your income. You may even reach a point at which the returns from your savings is enough to support your loved ones. Finally, it’s wise to sit down with your financial planner to review your coverage and make sure that you have a proper amount. You could simply be carrying too much insurance. Trimming it back will reduce your expenses.
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