Buying Life Insurance – Do’s and Don’ts
Posted by gcooke | Filed under Insurance
Glenn Cooke offered to do a series of blogs on life insurance. This is one of those areas of personal finance that people most misunderstand, and I jumped at the opportunity to have an insurance specialist give y’all the lowdown. So here is Part 3 of Glenn’s 3 part blog.
You know how much life insurance you need. You know what type of insurance you need. Now we need to figure out what policy and company is best for us, while doing so at the lowest premium. Here’s some do’s and don’ts as part of that process:
- Do use a broker that shops many companies. Individual brokers and agents don’t set the rates, the insurance companies do. What a broker brings to the table isn’t the ability to get you better rates from a specific company, it’s the ability to get you the least expensive company by shopping widely.
- Do take your medical exam first thing in the morning before you exercise or have anything to eat or drink. Your blood pressure is generally low in the mornings. And by waiting to eat until after the blood test you don’t force the underwriter to figure out if the floaters in your blood are some horrible wasting disease or just the greasy McBreakfastburger you just ate.
- Do make sure your term policy is convertible (to permanent). This ‘conversion’ feature in many term policies guarantees you the right to trade in your term policy and get a permanent life insurance policy, at healthy rates – with no medical exam. If you bought term insurance and later become uninsurable, conversion means you can still switch to permanent insurance and get it at healthy rates without any medical questions. It’s like locking in your health status. It’s also a vital fallback if you buy term insurance and later become uninsurable. Converting to permanent insurance (and at healthy rates too!) means you won’t lose your coverage as the result of your term policy expiring.
- Do assume your health is regular if you are in fact in good health, and even if you think your health is better than regular. Insurance companies offer ‘regular’ health class premiums, and then they have some super-elite yet only slightly lower premiums they call ‘preferred’. Unfortunately few people actually qualify for those preferred rates. Worse, your general health and fitness level isn’t always a very good indicator of whether you’ll get those better rates. If you’re in good health and assume when you apply that you’ll get the ‘regular’ healthy rates you’ll almost always be correct. If you’re wrong and you qualify for the better rates, the company will give them to you automatically anyway. However if you assume that you’ll qualify for the super-elite preferred health class, chances are that you won’t actually get them and when the policy is issued you’ll be facing higher premiums than you’d planned for. So when you’re running quotes, run them with your health class set to ‘regular’.
- Don’t buy less life insurance to make it cheaper! Instead, buy a policy with a shorter term. When people find premiums unaffordable the tendency is to buy less life insurance. The downside of approach is that if you die, your beneficiaries don’t get enough life insurance. You’ve deliberately planned to not leave enough behind. If however you need a 30 year term and instead buy a 20 year term you’ll be covered properly for 20 years (the same is true if you need permanent insurance but purchase term to lower your premiums). The downside of this approach is that you have to do something in 20 years – buy a new policy if you’re healthy or use conversion if you’re not healthy. And because you’ll be older then, premiums will be higher. Effectively you’re deferring higher premiums until later (though realistically, we hope that you’ll be better able to pay those higher premiums later anyway). The downside of buying the wrong term (deferring higher premiums until later) is better than the downside of buying the wrong amount (if you die, your beneficiaries don’t get enough money).
- Don’t worry about ‘renewability’ on term policies. Instead make sure that your initial term is as long as you think you’ll need the insurance for without having to renew. Renewals used to make sense on term insurance. You could buy a 5 year term policy and just automatically renew it every 5 years at great rates. Those were the good old days. Today’s term policies have crazy high renewal premiums. Making sure you have a term that’s long enough so that when your renewal comes about (at the end of the term), you’re expecting to cancel the policy anyway.
- Don’t withhold information during the medical questionnaire/application. Instead, be verbose. Bore them to tears with the level of detail in your answers. Firstly misinformation or withholding information is one of the few ways that an insurance company could potentially deny a life insurance claim. And secondly by being verbose you give the underwriter the ability to make a firm decision on the best possible rates they can give you. If they’re teetering on the edge of better or worse rates, don’t leave them having to err on the side of caution. Leave them thinking ‘no problem with the better rates. I’ve got this client down cold’.
- Don’t mix life insurance and investments. Buy insurance because you need a specific amount of money when you die. Lose sight of that goal and you run the risk of buying either the wrong type or wrong amount of insurance. Yes there are some instances where life insurance policies can seem attractive as an investment. Most of the time those investments are not guaranteed and can go very, very wrong. And most of the time you’ll actually have better investment options like paying down your debt!
- Don’t worry about company size. Size. Doesn’t. Matter. Neither you nor I can tell if a company, large or small, is going to be in business 20 years from now, and current size is no indication of whether they will be or not. In addition, the life insurance companies have minimum guarantees should a company fail. These guarantees are detailed further at the industry association’s website Assuris.
- Don’t smoke! As a former pack a day’er myself, I don’t have any thing to say about smoking as part of your lifestyle – smoke or not, it’s up to you. But I have plenty to say about smoking as a financial choice. It’ll double your premiums. (and I can only imagine what Gail’s take is on spending budget money on cigarettes 🙂 ). Conversely, quitting smoking will probably cut your life insurance premiums in half. Insurance companies will consider you for nonsmoking rates after you’ve been free for 1 full year. That doesn’t mean you should defer your life insurance purchase for a year – that’s another don’t! Buy it now. Just buy a shorter term (rather than locking in smoker rates for a longer period) then get started quitting today. Once you’ve quit smoking for a year, then reapply at nonsmoker rates and get the proper term.
Now you’re still wondering, how much is all this actually going to cost? Well, let’s put some numbers to this. Below is a life insurance quote form with live quoting capability. This is the same software that many brokers and insurance companies use inhouse, it’s the same software I use if you call my office for a quote. Armed with competitive pricing information ensures that you’ll have a good idea of how much you should expect to pay when it comes time for you to finalize your purchase.
Glenn Cooke is an independent life insurance broker and president of Life Insurance Canada He can be reached at (866) 662-5433.
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