8 MIN READ
7 Life Insurance Traps That Cost You Big Time
If I had to pick between paying extra for bacon on my cheeseburger or handing those dollars to an insurance company, I think I know which I’d choose.
Hopefully we’re all on the same page here.
Paying money to a life insurance company isn’t likely at the top of anyone’s fun-ways-to-spend-money list. While some people are happy to get approved and just pay to keep the insurance company from calling during dinner, a little due diligence can help us save in the long run.
As a seven-year veteran in life insurance sales, I’ve spoken to thousands of consumers all across the country about their purchases, and most of them make similar mistakes over and over. I can shed some light on these common errors and save you time and money.
Whether you’re buying new or looking to drop your premiums, here are seven ways many people are overpaying on premiums — without even realizing it.
1. Paying Quarterly
This payment method is outdated and it’s costing you. Never choose to pay quarterly when you’re handing over your payment information at application.
“Based on our data, 99.9% of the time, you will pay less per year if you make your payments monthly versus quarterly,” said Nic West, president of NinjaQuoter. “Because the carrier doesn’t have to directly bill you and lapse rates drop significantly, it’s an easy way to save a couple bucks, and get your payment automated.”
But hey, let’s not stop there. Why not save even more? Try paying annually, if you can afford it!
Here’s a quick breakdown of costs for a healthy, non-smoking male, aged 35, who’s considering a 10-year, $250,000 policy.
Note: Rates shown here are representative of actual quotes for a top-rated applicant and are subject to underwriting and carrier availability.
Quarterly: $34.25 per quarter, or $137 total per year
Monthly: $11 per month, or $132 total per year
Annually: $125 per year
This person would save nearly 9% just by switching their payment from quarterly to annually.
2. Skipping the Exam
One increasingly popular life insurance product is one where you can skip the medical exam. Sounds peachy, right?
If you’re tragically scared of needles, go for it. But you can earn yourself a lower rate by taking the exam.
While the savings can be nominal, older applicants and those looking for larger amounts of coverage could see more drastic savings.
The cost of life insurance increases as age does. The age-based increases are exponential, not linear, so the costs creep up for younger applicants but skyrocket for older applicants.
Let’s play the numbers game again with the same gentleman from above.
No Exam Policy: $12.03 per month or $137.50 annually
Fully Underwritten Policy: $11 per month, or $125 annually
If you’re going to pay your life insurance premiums for 10 or even 20 years, is a medical exam worth saving 10% or more to you?
3. Buying the Wrong Product
Ah, the old “term versus permanent” debate.
For the average person, a term policy will do just fine. Term is your most basic policy, where the only components are a premium and death benefit; however it terminates after a certain period. A term life policy is your cheapest option, per thousand of coverage.
Permanent life insurance, which costs more because the carriers are on the hook to pay out regardless of when you die, has more niche purposes than most of us will need. The excess premium you pay for permanent coverage also creates a small, accessible cash value, too.
But, I think we all know we’re not buying life insurance to make money.
The argument doesn’t stop there, as life insurance companies are more clever than ever. Have you heard of Return of Premium Term? It’s a policy where you pay a little extra for what is essentially a term product, but when you get to the end of the designated term period, you get all your money back!
Is it worth it? Let’s find out using a similar simulation from above on a 20-year duration.
Return of Premium (ROP) Term: $46.54 per month, or $535 annually
Traditional Term: $14.13 per month, or $161.49 annually
Ouch! Sure, maybe you get a nice check for over $10,000 when it’s done, but are you willing to more than triple your outgoing cash for it?
Oh, by the way… if you don’t make it to the very last month, you get nothing back.
4. Locking In Rates for Far Too Long
No one can predict the future, but if you decided to lock in your rates for too long, you’ll end up overpaying for as long as you keep your policy.
The idea behind locking in rates is you won’t have to worry about increasing costs or retaking the medical exam. You’re locking in your younger, healthier you in case you decide to convert to a permanent policy later.
These points aren’t wrong, but if you can’t reasonably expect to keep the same life insurance policy for 30 years, don’t buy it.
Here’s what the guy from above would have to choose from based on term length:
10 Year: $11 per month, or $125 annually
20 Year: $14.13 per month, or $161.49 annually
30 Year: $23.32 per month, or $266.49 annually
The jump in premium to a 20-year policy may not hurt too much, but the 30-year policy is quite the hike. The security of owning a 20-year policy for just a few bucks more might seem worth it, and there’s no fee or penalty to lower the benefit or close a policy before its end date.
However, as the age of the applicant increases, the differences in premiums grow faster and faster. For this reason, choosing the right duration is even more important for older applicants than younger ones. That way you ensure you’re not paying for something you’ll never need.
5. Falling for the ‘Bundling' Trick
Did your local insurance agent ever ask you to “save” by “bundling” your life insurance, car and homeowner’s insurance policies?
Do yourself a favor: Don’t.
“For the first time, satisfaction with price is higher among unbundled customers than among bundled customers,” according to J.D. Power and Associates.
The additional cost of bundling the life insurance policy is enough to offset the discount on your car insurance, and then some. In other words, if you kept the higher car insurance premium and bought a separate life insurance policy, the net cost of the two would be lower than a “bundle.”
6. Getting Suckered Into Intro Offers
Introductory offers aren’t just for credit cards.
Several companies specializing in senior life insurance products are happy to offer the first month’s coverage for just a dollar! But then what?
These policies have a lot of backend backlash!
For example, starting in month two, they push you into age brackets of up to five years separation, spreading the heavy costs over all the applicants in this age group.
Wait, there’s more! They also get you by saying there’s “no medical questions” and “no medical exams.”
These guaranteed life insurance policies not only cost the most per thousand compared to any other life insurance, but they also have graded payouts, meaning your beneficiaries may only get a portion of the benefits you applied for in the first two or three years of the policy.
7. Paying Smoker Premiums When You Don't Use Cigarettes
It’s well established that smoking costs money. While we can’t help cigarette users, there’s a quick and easy win for those of you who use e-cigarettes but are still paying smoker’s rates because your agent didn’t know otherwise (tsk, tsk).
E-cig users now have access to rates up to standard plus (a discounted rate, even). The best three non-smoker ratings you can get, all considered discount premiums, are Preferred Plus, Preferred, Standard Plus. Each is slightly discounted compared to the base premium, called Standard.
The only caveat? You cannot have used a single cigarette or other tobacco product — aside from e-cigarettes — in the past year and you must disclose this information on your application.
It’s imperative you let the insurance company and agent know about your e-cigarette use at the time of application — not after they find out through a blood test or mouth swab.
And, finally, if you’ve made it this far, here’s a little extra nudge for your wallet.
Bonus Tip: Ask About Paying With a Credit Card for Points Or Cash Back!
Not many carriers are on board with this just yet, but you’d be surprised which companies are.
Ask to pay your premiums with a credit card and take advantage of the perks your card offers, like cash back or some much-needed points to get you your next ticket to paradise.
Jason Fisher is a multi-state licensed life insurance agent and founder of BestLifeRates.org, a seasoned craft beer snob and homebrewer, avid runner, a father to two wild and crazy boys, and a diehard Ford Mustang enthusiast.