According to the 2021 Insurance Barometer Study, industry groups LIMRA (Life Happens) and Life Happens, more than half of Americans underestimate the cost of life insurance. 44% of millennials believe that a $250,000 20-year term policy would cost $1,000 per year for a healthy 30-year old, while the real price tag is around $160.
It’s easy for you to pay too much if you expect a high price. These are six indicators that your life insurance policy is too expensive and tips to reduce it.
A policy is purchased for its cash value.
You might overpay if you shop for life insurance solely on how it will benefit you while you are still alive. These policies can be expensive. However, permanent life policies slowly build cash value which you can withdraw under certain circumstances.
James Brewer, an Illinois financial planner and founder at Envision Wealth Planning, says that people talk about using the money for their children’s college expenses or for retirement income.
Instead, Brewer recommends you focus on how much life insurance you need to support your family if you die. A term life policy can cover most of your needs. It is a more affordable option to permanent insurance and is the best fit for most people.
You have expensive add-ons to your policy
You can add life insurance riders to your policy to personalize it. This can increase the premium cost.
One example is a return-of-premium rider. If you are still alive at the expiration of your term life policy, this option allows the insurance company to refund all premiums. Although it is a striking feature, a return of premium rider can increase your premium by up to three times. Sam Price, an Alabama independent life insurance agent, says that it is a poor use of money. “They will give you your premium back but not the interest you could have.”
Price suggests that an accidental death rider may not be worth the cost. If you are killed in an accident, this rider will increase your death benefit. Insurance companies have specific guidelines about which accidents they will cover. If the death is not covered, the additional benefit will not be paid.
An exam for medical reasons is not required
To determine the risk of you being insured and to decide how much coverage you will pay, insurance companies conduct medical exams. Insurers may assume the worst if you don’t have to take a medical exam. You’ll likely pay more.
Some insurance companies allow you to skip the exam by offering accelerated underwriting. These companies use algorithms that analyze data about you to quickly decide whether to issue a policy. Price states that while some people might still be able to get the best price by doing this, other people could end up paying more than if they took the exam.
Premiums for the policy are not equal
An annual renewable term life insurance policy starts with a low premium and increases each year. The policy can get more expensive over time. Price sent an email explaining that if your premiums are increasing each year, it’s likely you’re paying too much.
A better option is level term life insurance, which has premiums that stay the same over the lifetime of the policy and is typically cheaper in the long run.
You waited too long for life insurance
As you get older, life insurance costs rise. A policy bought in your 50s may cost more than one purchased at 30.
Susana Zinn, an independent California life insurance agent, wrote in an email, “Don’t procrastinate.” “Life insurance is often less expensive than you might imagine.”
It’s best to purchase a policy as soon as you realize you will need it. This will ensure that you get the best rate for your age and your health.
You didn’t shop around
It is best to shop around for the best life insurance policy at the lowest price. You could be paying more if you go with the first policy that you find. Prices can vary greatly from one insurance company to the next.
You can compare life insurance quotes from several companies online or through agents. Price says that if you are open to having a conversation with multiple agents, you will be better equipped to make informed decisions and get the best value for your money.
The first step to choosing the right life insurance policy for you is to decide how much coverage you need. Although it may seem obvious, most agents and insurance companies begin conversations with you about products and policy features. It is important to ensure that you don’t pay more for life insurance than you actually need. This will help you balance your risk mitigation and your future spending.
- Insurance companies will tell you that bigger is better when it comes time to purchase a life insurance policy.
- You could end up paying more for life insurance than you need. You can’t save money if you purchase more life insurance than you actually need.
- It is all about finding the right balance between your financial obligations and planning for the future.
Many life insurance companies will try to sell more life insurance than what you actually need. You will have less money to invest in other areas of your financial life if you overpay for life insurance.
Realizing that you are not a fairy godmother and can’t make your financial dreams come true is part of being an adult.
You don’t have unlimited money. It’s up you to find the balance.
It is not always easy to find and maintain that balance.
You shouldn’t spend more on life insurance than you absolutely need to create a secure financial future.
What life insurance companies won’t tell your?
Perhaps you’ve heard the expression “The bigger the better.”
This might hold true for ice cream but it isn’t always the case when it comes to life assurance.
You have a limited amount of money, so your priorities will dictate how you spend it.
How can you decide how much to spend on a policy.
Everyone will have a different answer. There isn’t a single “best” way to spend money, just like there isn’t a one-size-fits-all cost of life insurance.
Three things that can drive financial stability
Balance is the key to not paying too much for insurance. To find balance, however, you need to examine your financial decisions.
You can break down your financial decisions into three “buckets” or categories.
- Current spending
- Future spending
Current spending refers to everything you are spending your money on now. This includes your mortgage payment or rent payment, utility bills, cell phone bills and clothing, entertainment, and any other lifestyle expenses.
Future spending is any cash that you have set aside to help meet your financial goals. Future spending includes saving money for a downpayment on a home or college education.
Last, there is protection. This includes the amount you spend for life, auto and health insurance.
Your standard of living will be determined by how you allocate your cash among these three buckets.
Here’s the problem.
You’ll be able to achieve your financial goals less if you spend more on current expenses.
You won’t be able to afford the life insurance policy if you spend too much.
You might not need as much life insurance as you think
If the worst happens, life insurance will provide protection for your family members. If you have someone who relies on your income, consider purchasing a term life policy.
Your family wants to be able to live comfortably after your passing.
However, your premiums should not break the bank.
There are some things you should keep in mind when deciding how much life insurance you want to purchase.
Taxes are not a concern
According to them, death and taxes are the only sureties of life. This is not always true. The death benefit of life insurance is not taxable, unlike your salary.
Here’s what the IRS says about life insurance proceeds:
“Generally, the life insurance proceeds that you receive as a beneficiary in the event of the death or disability of an insured person are not included in gross income. You don’t need to report them.”
Taxes don’t always apply so you don’t have to increase your death benefit in order to cover the cost.
Consider your direct expenses
Your income is a major factor in the amount of life insurance you purchase. However, it is not always necessary to replace your entire income.
Consider this: If you earn $57,000 per year, some of that money goes towards food, clothing, gas money, and other expenses.
After you pass away, your direct expenses disappear. Because your family will no longer have these expenses, your policy does not need to pay your entire $57,000 salary.
More good news: while this used to be hard to calculate, our technology does the math for you! Answer some basic questions, and our algorithm will use data from the IRS and Census Bureau to calculate how much it would cost to maintain the same standard living standards for your family members as your current income.
Forget about college and your mortgage payments
The majority of life insurance advice advises that you get enough life insurance to replace your income, cover major expenses such as your mortgage and your children’s college tuition.
However, you will end up paying much more for life insurance this way.
Here are the reasons it doesn’t make sense.
Your salary should be sufficient to pay your mortgage and save for college for your children.
You are being redundant if you increase your policy proceeds to pay off your mortgage and cover college tuition, in addition to replacing your income.
You are effectively buying twice the insurance you actually need.
This means that you will likely pay twice as much.
Don’t pay too much for life insurance
You could end up paying more for life insurance than you need. You can’t save money if you purchase more life insurance than you actually need.
You might have to wait longer to buy your dream home, miss the Paris trip you always wanted or not have enough capital to start the business that you want.
Everyday Life believes that balance is the key to a happy life. Everyday Life believes that you should not sacrifice your lifestyle for life insurance premiums.
We make life insurance more accessible and affordable than ever.