They say there are only two certainties in life: death and taxes. But a third could be rising life insurance premiums. And while life insurance is a necessity for most, there are ways to reduce your costs significantly over a lifetime. It could translate into savings of tens of thousands of dollars.
Most people know the cost of life insurance goes up the older you get. It's also more expensive the less healthy you are. And actuaries – the people who determine what the premiums will ultimately be based on mortality statistics, interest rates and other factors – also know that even if you qualify as healthy today, there is a chance that you will become unhealthy tomorrow.
Glenn Cooke, president of InsureCan Inc., provided me with some real-life quotes to help demonstrate how this can affect the cost of your insurance.
For example, for a 40-year-old, non-smoking male in good health who wants $500,000 of term life insurance coverage, one company's quote is a monthly premium of $30.78. After the 10-year term is up, you can automatically renew – but the monthly premium increases to $231.75.
Contrast this to the same coverage if a 50-year-old man applied today and qualifies as healthy: his premium is only $71.42 a month.
So why are two men the same age paying a different price for an identical product?
According to Mr. Cooke, the reason for the discrepancy is that insurance companies use two different sets of mortality tables when pricing life policies. A "select" mortality table factors in your specific level of health, which is obtained after taking a medical assessment upon application for the policy. They know exactly how healthy you are today.
The select mortality table is only used to price the insurance for the first term.
For every successive term, the policy is priced using what is called the "ultimate" mortality table. These are the statistics for the general population, which does not differentiate based on level of health.
It therefore includes unhealthy people who have a great chance of dying sooner, and therefore could potentially collect a large insurance benefit while only having paid premiums for a short while. That gets factored into the price, which means it goes up.
Some people renew their policies at the higher rate without giving it a second thought. However, if you can still qualify as healthy you could simply get a new policy at a lower rate and save big bucks. (Remember never to cancel an old policy until you have the replacement policy in its place. You don't want to run the risk of being uninsured.)
Further, if you take a new medical assessment and learn that you have become uninsurable or otherwise unhealthy, talk to your insurance adviser about converting your existing policy to a permanent one. In most cases, term life insurance policies are guaranteed to be convertible.
Permanent insurance is essentially like term insurance, except the term isn't five or 10 years, it's for the rest of your life. That means it's more expensive today, but the rate will hold forever. Mr. Cooke says the ability to convert a policy is an important feature to look for.
While a term life policy might not be the right solution for everyone, understanding how policies are priced over time can save you a lot of money.
Death and taxes are still a certainty, but just how fast your premiums rise if you are healthy is certainly not.
Savings for re-qualifying as healthy, versus automatically renewing term life insurance.
Healthy, non-smoking 25-year-old male, $500,000 face value, 10-year term.
Age 25-34; monthly premium is $27.90
Age 35-44; monthly premium is $58.95
Age 45-54; monthly premium is $122.85
Age 55-64; monthly premium is $304.65
If he automatically renews his policy until age 65, his total premiums paid are $61,722.00.
Re-qualifies as healthy every 10 years:
Age 25-34; monthly premium is $26.10
Age 35-44; monthly premium is $25.56
Age 45-54; monthly premium is $47.12
Age 55-64; monthly premium is $131.13
If he re-qualifies as healthy every 10 years until age 65, his total premiums are $27,589.20.
TOTAL SAVINGS: $34,132.30
Quotes provided by Glenn Cooke, life insurance broker and president of InsureCan Inc.