Understand the Facts and Don’t Pay More Than Necessary

Key Ideas

  1. There are five primary factors that affect the cost of life insurance.
  2. Life insurance policy fees will add to your all-in expense.
  3. There are easy ways to reduce your life insurance costs — start with these 7 tips.

When we think about making a major purchase, the first thought that comes to mind is usually: “How much is it going to cost?”

Life insurance is no exception.

When you purchase a life insurance policy, you’re making a financial commitment that you’ll likely carry for decades.

Not only that, but life insurance is a negative expectancy bet.

You hope to pay your premiums and outlive your policy. The insurance company makes a profit because most people never collect.

Obviously, you want to pay as little as possible for life insurance.

Unfortunately, buying a life insurance policy isn’t like buying a television or a new pair of shoes. The cost varies among carriers and depends on your age and hundreds of different health criteria. If you visit 25 different insurance carriers, it’s extremely likely you will receive 25 wildly different quotes.

This makes comparison shopping difficult at best. When you’re looking for a policy, you’re likely to ask questions like:

  • How does the life insurance company come up with my quote?
  • How do I know if I’m getting a good deal?
  • Is there anything I can do to minimize the cost?

These questions are important, and understanding the answers will help you avoid some of the most common life insurance mistakes.

Related: Learn how to buy a life insurance policy online, the smart way

If you buy a policy that you can’t afford and end up allowing it to lapse, then you’ve done nothing but waste your time and money. On the other hand, if you make your decisions based only on price, there’s a chance you’ll end up with insufficient coverage or buying from a poorly rated company that might not be able to meet its obligations when the time comes.

The good news, however, is that life insurance is probably far less expensive than you think.Studies show that while 63 percent of people think they can’t afford life insurance, most of the population significantly overestimates its cost. Getting the facts will help you make smart financial decisions and protect your loved ones.

Do you know how much a life insurance policy will cost you? Are you clear on all the factors that go into determining your final price? Learning the answers to these questions will help you find the ideal policy to fit your needs and your budget.

Example 20-Year Term Life Insurance Cost by Age

As you will learn below, there are many factors that affect the cost of life insurance including your age, the type of policy, the policy term, and whether or not you have a medical exam when you apply.

Because life insurance rates vary so widely, it’s impossible to show you exactly how much life insurance will cost you. However, the table below provides some sample rates per $100,000 of coverage for a 20-year term life insurance policy (one of the most common life insurance products purchased). Your mileage will almost certainly vary, which is why it’s so important to get several quotes from reputable life insurance providers and brokers.

Sample Monthly Premiums Per $100,000 (20-Year Term Life Insurance)

Age With Medical Exam Without Exam
20 $8.75 $11.50
30 $9.50 $13.00
40 $11.50 $17.50
50 $23.00 $34.00
60 $55.00 $85.00
70 $175.00 Not Available

As you can see, life insurance rates begin to climb dramatically after the age of 40. In addition, healthy applicants who take the extra step of having a medical exam can save a decent amount, especially if they’re older.

5 Factors that Affect the Cost of Life Insurance

There are five primary factors that affect the cost of a life insurance policy: The policy details (type, term, death benefit, and riders); your age; your health; your gender; and your lifestyle factors.

Let’s take a deeper look into each of these factors.

Policy Details

One of the most important factors that affect how much your life insurance policy will cost is the type of policy you choose and how it’s designed.

Policy amount

The first thing to consider is the amount of life insurance coverage you really need.

In general, the higher the death benefit, the more expensive the policy. This means that a $100,000 policy will be far less expensive than a $2 million policy.

Related: Life insurance calculator

However, you won’t want to skimp out on coverage just to save some money. It’s important to think about why you need life insurance, then take the time to accurately calculate the amount of coverage you’ll need to meet your goals. If possible, give yourself a little bit of wiggle-room in case your circumstances change in the future.

Policy term

The next major factor is the length of time your policy will remain in force. While making this decision, you’ll have to choose whether you will purchase a term insurance policy or a more expensive permanent policy.

Term life stays in place for a set period of time, often 10, 20, or 30 years. If you pass away while the policy is active, your beneficiaries will receive a death benefit. However, if you live one day past the term, your coverages ceases and your beneficiaries receive nothing. This is the most common type of insurance and also the least expensive. Most people purchase it to cover expenses during their working years, while their children are minors, or during some other set time period.  By the time the policy lapses they have no need for the coverage and can happily eliminate this expense from their budget.

Policy type

Permanent insurance, like whole life, universal life, and variable life, doesn’t ever lapse unless you stop paying your premiums. This means your beneficiaries will receive a death benefit whether you die tomorrow or live to be 110. These policies have a separate cash value component, and some allow you to invest a portion of the policy value for greater growth. However, they’re far more expensive than term policies and carry many extra fees. In fact, you’re likely to pay 6 to 10 times more for a whole life insurance policy than for a term life policy with the same death benefit.

Optional riders

Finally, many carriers offer life insurance riders, which are basically mini policies that you can add to your main policy. Riders can add extra perks like lapse protection, early pay-out options, and providing coverage for long-term care needs. However, these also come with an extra cost.

Age

As you get older, it becomes more expensive to purchase a life insurance policy.

The primary reasons for this is that the older you are, the fewer years you’re expected to live. If you purchase a policy and then die shortly after, the insurance company won’t have time to collect enough premiums to offset the death benefit.

After age 40, you can expect your premiums to increase by 10 to 15 percent for every year that you wait to buy a policy. Once you reach a certain age, some carriers will no longer offer policies.

The good news is, once you purchase a term life insurance policy, your monthly or annual premiums remain level throughout the entire time the policy is in force. You won’t have to inform the company about any changes in your health or lifestyle and the fact that you’re getting older won’t impact your premium. This makes buying a longer term policy advantageous as long as it fits into your budget and you continue to have a need for coverage.

Health

Your health is another major factor that determines how much you’ll pay for a life insurance policy. The better your health, the less likely you are to die at a young age.

This makes you a good risk for the life insurance company, so your policy will cost less than someone with significant health issues.

Most insurance carriers require applicants to undergo a process, called underwriting, that helps them determine how risky it is to cover your life. This includes (among other things) a detailed review of your current health status and family history, a review of your medical records and prescription history, and a brief physical exam. Some companies also require bloodwork, a urinalysis, and/or an EKG.

Some of the health factors that are likely to result in a higher premium include:

  • Nicotine use
  • Use of recreational drugs (including marijuana)
  • High blood pressure
  • Hypoglycemia
  • High cholesterol
  • Heart disease
  • History of strokes
  • Uncontrolled diabetes
  • HIV/AIDS
  • Other chronic diseases or illnesses
  • Pre-existing conditions

Life insurance companies usually rate applicants in 12 to 16 different categories. The most common are Standard, Standard Plus, Preferred, and Preferred Best. Tobacco users usually have their own class (ex. Standard Tobacco, Preferred Tobacco). Applicants who don’t qualify for at least a standard rating will pay significantly higher premiums or could have their request for coverage denied.

There are many different life insurance companies and each uses its own methods to evaluate risk. If you run into a problem during your application process, it’s important not to give up. If one company gives you a less-than-ideal rating or denies coverage, request quotes from a few different companies. It’s likely that you’ll find at least one that’s priced closer to what you were hoping to pay.

Gender

Your gender also affects your quoted premiums.

Statistically, women live longer than men. For this reason, when all other factors are equal, a woman will pay, on average, 15 to 40 percent less than a man for life insurance.

Lifestyle

When evaluating how much of a risk you pose, carriers will also look at your lifestyle, hobbies, and occupation.

If you work in a dangerous industry or enjoy hobbies like skydiving, auto racing, or general aviation in your spare time, you’ll pay more for your life insurance coverage.

The insurance company will also factor in things like your driving record, whether you plan to travel to dangerous locations, and even your credit history.

Understanding Life Insurance Fees

In addition to the factors listed above, the additional fees included in a life insurance policy will also impact the cost. Depending on the type of policy you purchase, you may pay some or all of the following fees.

  • Mortality and Expense (M&E) Charges – this is the cost to provide the death benefit to the beneficiary.
  • Administrative and Sales Fees – this covers the commission the insurance agent earns, the cost to set up and maintain the insurance policy, and the insurance company’s ongoing expenses.
  • Investment Management Fees – this applies to policies that allow the owner to choose the underlying investments. The cost will vary depending on the types of investments you choose.
  • Withdrawal Fees – this applies to policies that allow you to withdraw a portion of the cash value. It’s charged each time you take a withdrawal and is usually a nominal amount, like $25.
  • Policy Loan Interest – if you borrow against your cash value, the insurance company will charge you interest on the loan.
  • Surrender Charges – many policies with cash values will charge you a surrender penalty if you take a withdrawal or lapse the policy early in the coverage period (typically within the first 10 to 15 years after the policy is issued).

Rather than simply looking at the quoted price, it’s important to carefully read the policy details and ensure that you understand all of the policy’s fees and expenses. This will help ensure that you aren’t blindsided by unexpected costs further down the line.

Tips for Reducing Life Insurance Costs

Even though life insurance is generally very affordable, we still want to make sure we’re getting the best possible deal on the policies we choose. Luckily, there are some simple things you can do to lower your life insurance premiums.

1. Kick Some Bad Habits

Using tobacco will increase your life insurance rates by as much as 25 percent. Some companies will also raise your rates for vaping e-cigarettes while others also consider marijuana use “smoking” and may place users in a tobacco class.

Kicking some of these bad habits can help you move into a better rating class, which will save you some money. Even if you already have a policy or you’re shopping for one right now, it’s still a good idea to make these changes today.

After you’ve been smoke-free for a year, many companies will allow you to ask for a re-evaluation. If you’re moved into a non-smoking class, your rates will go down.

2. Improve Your Health

If you live a sedentary lifestyle and/or eat an unhealthy diet, you’re likely to suffer from physical conditions like high cholesterol, high blood pressure, and obesity. Making even small changes to your daily routines can significantly improve your overall health.

Once you’ve implemented these lifestyle changes for at least a year, you can ask for a medical reevaluation, which will likely lower your rates.

3. Consent to an Exam

Some life insurance companies offer policies that are issued without the need for a medical exam. While this is convenient, it can also translate into higher premiums. Those who have health issues that might come up in a medical exam may find that policies without medical underwriting are beneficial. However, if you’re in excellent health, you’ll receive a much better price by going through the full medical underwriting process. In almost all cases, the difference in premium is well worth the extra effort.

4. Avoid Unnecessary Riders

A bare-bones term insurance policy without any extra bells and whistles is going to be your least expensive option. While the benefits offered through riders may seem appealing, they’re usually not necessary and are rarely worth the extra cost.

5. Pay Your Premiums Annually

While paying your life insurance premiums monthly might seem easier on your wallet, the insurance companies don’t offer this convenience for free. You can often get a discount of 2 to 8 percent of your premium by paying annually. Once you have enough cash flow to cover an annual payment, it makes good financial sense to do so.

6. Don’t’ Buy More Coverage Than You Need

While it’s good to have a little bit of padding when it comes to life insurance, buying too much will put an unnecessary dent in your budget. Take the time to thoroughly calculate the amount of life insurance you need and the number of years for which you need coverage.

Once you’ve figured out what you need, try rounding up to an even number and see how much the premiums change. Some companies have “sweet spots” for certain death benefits, like $100k, $200k, and $250k. If you determine that you need $90k in coverage, for example, purchasing a $100k policy is likely your best bet.

7. Layer Your Policies

Most people’s life insurance needs don’t follow a single timeline. For example, you may need a certain amount to provide for your children until they turn 18 and an additional amount to cover your 30-year mortgage. Instead of buying a large 30-year policy, it’s usually less expensive to buy a 20-year policy and a separate 30-year policy.

By layering your policies, you won’t end up paying for coverage you don’t need for an additional ten years.

Final Thoughts

While the cost of life insurance is certainly important, it shouldn’t be the only deciding factor when shopping for a life insurance policy.

You’ll also want to make sure the death benefit and coverage term you choose are appropriate to meet your goals and that you only do business with a highly rated carrier.

Now that you understand what goes into determining the cost of a life insurance premium, read more about how to compare and buy life insurance:

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