We
all like to know what we are paying for
and life insurance is no different.
Let's look at both the big picture of
life insurance cost and what you can do
to pay less of it. We'll first
look at what makes up the core premium
of life insurance and changes to this
base rate that you can actually have
affect on.
First, why does life insurance cost what
it does? Good question.
We've covered the core basis of life
insurance in other articles but here it
goes. Essentially, we are
spreading the financial risk of one
person passing away across as many
people as possible. The larger the
number of people, the smaller the cost
of life insurance since there is less
incremental risk for each person.
You're grouped together with people in
your same age, geographic area, and
general health status. These three
criteria are key drivers of life
insurance costs with age and health
status having the biggest impact.
So
our first take away is to purchase term
life as young as possible since you lock
in the premium amount for the duration
of the term life policy. You can
run a term life quote in our engine to
see the difference in cost between
different ages. This is a great
way to reduce your insurance costs.
Health status can also affect you
insurance costs and although this is
partially under our control, we do
control it. Issues such as
elevated cholesterol and blood pressure
can be addressed by many people
(although not all) through lifestyle
changes. This means money in your
pocket as it reduce term insurance
costs.
Geography has some impact since
mortality rates differ from area to area
but this is less under our control and
ultimately has less affect than age or
health status. So this makes up
the core costs of life
insurance...essentially a shared risk of
passing away early spread among many
people since the probability of any one
person passing away is small. On
top of this, the carriers will add costs
associated with administration, profit
(if it's a for-profit) company, and
reserves. Reserves are there in
case there's a run on the company from
an extraordinary claims experience.
All told, the largest part of your life
insurance cost comes from the underlying
risk and not the admin, profit, and/or
reserves. Life insurance,
especially term insurance has become a
very competitive market and more of a
commodity. This is good news for
you since the cost difference between
different sources of term insurance
shrinks. As you run your term life
quote, you'll notice that the carriers
are all in the ball park for similar
age, area, health situations.
Finally, there is usually a annual
policy fee for most of the term
insurance plans. This is pretty
comparable as well, again...going back
to the commodity nature of the market.
If a carrier charged too much for their
annual fee, no one would purchase their
policy. Keep in mind when looking
at the cost of life insurance that
you're viewing them through the lens of
today's dollars although you'll be
paying them with tomorrow's dollars.
This means that $100/monthly insurance
cost today might feel like $96 next year
and even $60 10 years from now.
This effect is due to inflation and
should be taken into account for both
the cost of life insurance and expected
benefit.
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