Families are taking a close look at their budgets these days to find expenses to cut. And while life insurance may seem like an easy place to save a few bucks, letting a policy lapse may be trading long-term security for short-term savings.
“The dangerous thing about tough times is that things that don’t seem critical get pushed aside,” says Byron Udell, founder and CEO of AccuQuote, an online insurance broker and comparison service based in Wheeling, Ill.
Udell says trimming expenses like dinner out is one thing. “But with life insurance, you are taking a big risk by letting a policy lapse,” he says.
So, rather than cutting your coverage in the new year, consider these cost-saving moves instead:
People are living longer now than they ever have, and life insurance companies have taken notice. Since the mid 1990s, insurance companies across the nation have begun using new actuarial charts that reflect those longer life spans, which translates to lower life insurance rates.
That means that if you bought a policy in the years before the change, your rate is probably much higher than it needs to be.
“Most people who have term life policies are overpaying,” Udell says. “Rates have come down dramatically in the last 15 years.”
He says that in the mid ’90s, a man in his 40s would pay $995 a year for a $500,000, 20-year policy. “And that was a terrific rate,” Udell says.
Today, that same policy would likely cost just $350 a year — less than half the cost.
“Now, you have to keep in mind, that same customer isn’t 40 anymore, and so his rates would be higher, but the point is that rates have come down dramatically,” he says.
Steven Weisbart, vice president and chief economist for the New York-based Insurance Information Institute, says the best answer for most people is to shop around. And since you don’t have to cancel your existing life insurance policy to do that, comparing rates is risk-free, he says.
“Shopping costs you nothing but energy and time,” Weisbart says.
Comparing rates especially makes sense if you didn’t get one of the top rankings with your original policy, he says. That’s because along with the longer life spans, many life insurance companies are also taking into account developments in medicine over the last few decades when they price a policy.
“People who died of a condition years ago now live with it for years,” he says.
So, if a company wouldn’t even consider you for coverage years ago, you may just qualify today.
On the other hand, if your health has slipped significantly, or if you have put on more than a little weight, or have taken up smoking since you first bought your policy, you might do best by sticking with the old insurance, Udell says. That’s because, even with the lower rates, you may not qualify for the best coverage anymore.
If you are desperate to squeeze down your insurance costs, one option may be to reduce the amount of coverage you have.
“It’s not the best solution, but it’s better than dropping it altogether,” Udell says.
Going with a smaller policy will reduce your premium, but the danger is twofold. First, if you were to die, your family may not have enough to replace your income. And second, once your finances improve, your health may not be as good, and that would mean you may have trouble getting that coverage back without having to pay an arm and a leg.
On the other hand, many older policies may be suffering from the opposite problem.
While a $100,000 life insurance policy seemed like a fortune in 1990, it may not be nearly enough to cover today’s expenses, Weisbart says.
If that is the case, it may make sense to either buy a second policy to make up the difference, or even to cancel the old policy and replace it with a larger one at today’s rates.
For help in determining how much life insurance coverage you need, consult Bankrate’s life insurance calculator
Life insurance comes in two basic “flavors” – term and cash value.
The different types of policies make sense for different financial situations. With life insurance, one size certainly doesn’t fit all, and with a tight budget, you may just find that your policy doesn’t fit you anymore.
As a rule of thumb, term insurance is much, much less expensive than the cash value variety. And while cash-value insurance can come in handy for special circumstances, such as if you have a special-needs child, or to offer some financial stability in rough financial times, term insurance tends to rule with budget-conscious buyers.
With financial misdealings and banking scandals making headlines seemingly every week, one good practice when shopping around for life insurance options is to make sure you are only buying from a sound company.
One way to do that is to rely on the ratings of companies like A.M. Best, Standard & Poor’s, Weiss Research, Duff & Phelps, or Moody’s Investors Service.
These companies check the financial books of the different insurance carriers and make sure the companies will be around if you ever have to cash in that policy.
“These things are tough to judge on your own,” Weisbart says. “But you can get some help.”
Weisbart suggests you check the ratings of your company against at least two of these services to make sure the first one you picked wasn’t skewed in some way.
If shopping for an insurance policy still seems daunting, you aren’t alone — at least you don’t have to be. That’s because in every state, life insurance rates are set by regulators. That means, whether you buy your insurance with the help of a broker, or if you go it alone, the price is the same.
“Since it doesn’t cost extra, why not get help from an expert?” Udell says.
But Weisbart says you don’t have to start the process in an agent’s office.
“It is not a bad idea to go on the Internet and get quotes from sites like Accuquote and Insure.com before talking to a professional,” he says. Another good site to get information and quotes is InsureMe.com, a Bankrate company
With a rate in hand, you can be more confident that the broker is being forthright with you.
Where the agent really excels, Udell says, is by steering you toward a policy that fits your specific needs.
“People are bad about knowing what rate class they will qualify for,” he says. “If you have risky hobbies or ailments, knowing which company won’t charge more for that can end up saving you a lot of money. Brokers know which companies offer what and which companies are your best fits.”
Assuming you already have the lowest rate available, there is still one more step you can take to ease the burden of your life insurance bill — ask for a payment plan.
Nearly every insurance company will let you split your premium into monthly installments, and many won’t even charge more as long as you agree to have the premium automatically deducted from your account.
The bottom line is that you want to make sure you have enough coverage to pay your expenses if you die, without paying more than you need to.
Michael Giusti is a freelance writer and teaches journalism at Loyola University New Orleans.