There are a wide range of choices when buying insurance. You can get life insurance from:
- A captive agent who represents one company
- There is the internet
- Your general insurance company (auto, home) will usually sell life insurance (even though they are regulated by the same body, they are not licensed the same as a life and health advisor)
- Affiliate groups like your professional association or alumni group have plans (and likely get a kick-back from the insurance company, but that may keep your dues down)
- The group plan where you work may offer optional add-ons (e.g. one time salary as a base plan but you can buy up to five times), or
- An independent licensed insurance broker will work with multiple well-known companies. A good financial advisor will help you work through what you need. You make the decision how much you need for how long, and then the advisor finds the alternative products to best provide the need that you have defined, without getting over-insured or not having enough, within your budget.
For the insurance portion of your financial plan you have now defined a set of needs, in terms of amounts and the term of coverage you need to buy. It is time to go shopping.
Shopping for insurance
Let’s compare to shopping for a car. You have defined your need as a four door sedan for the family and a panel van for your business. You visit a number of car dealers. They will all have different names for their sedans, and perhaps several models from compact to full size, all with a range of engine, transmission and trim options. So will the insurance companies. This is why you need to know how much of which size of sedan you actually need, or length of lease you want on the van. Some of the options offered may sound of value to you. But like the better trim levels of a mid-sized sedan, there is a cost. Carefully evaluate if the marginal cost of a feature will give you more marginal utility, better value for your money, or is it just so much snake oil from the salesman?
I have a beef with insurance salesmen who sell “double indemnity”, where the policy pays double the face value if you die accidentally. Everyone expects if they die prematurely, it will likely be in an accident, and the extra premium is not much. Reality check! Insurance companies are not charities. Double indemnity is only cheap because the odds are ten to one you will die from natural causes, even in your 30s, than from an accident. Secondly, remember you have defined the need, say for $500,000 of coverage. Buying a $250,000 policy with a double indemnity rider is not good risk protection. On the other hand, buying $500,000, then adding double indemnity is a waste of money. Buy a lottery ticket instead.
Term insurance is less open to product differentiation by the companies when they are trying to establish greater “value” in their brand names. The most common variants are ten year term or twenty year term. The shorter term costs less. It is covering less risk for younger ages when the cost per thousand is less than it is in the later years of the twenty year term. Insurance companies use T10 products as a bit of a loss leader to get clients signed up to their brand. However, if you have defined the need period as twenty years, say to pay off the mortgage and get the kids through college, then the higher premium T20 will be more cost effective over your defined term than renewing, at a much higher premium, after the first ten.
Like everything, there is an exception. The first need is to provide for the amount of coverage needed. You and your spouse might determine $500,000 coverage is the minimum need if one of you were lost now. But in your early thirties, in a new job, with two pre-schoolers and a new home, scare resources are even scarcer. Even if the ideal plan says you should use $100,000 permanent and $400,000 term, it may be better at this point to use a ten year term for $500,000. That would cost $68.85/month for two thirty year old non-smokers, versus $231.48/month for the “better” combination. But build it into your plan to convert $100,000 of the term to permanent in five years.
There is one more thing you can do to reduce your cost of insurance: quit smoking. Even a social puff at a party in the last twelve months can classify you as a smoker, and the premiums are close to double. A smoker may be better off with a Term 10 and a financial plan to quit so that they could convert to a longer term at non-smoker rates in the future. This is managing a risk by reducing your risk factors. Insurance companies may not be charities but they are competitive businesses and will give you a better rate if you can give them a better risk.
Fredrick Petrie, author of “THE END OF WORK: financial planning for people with better things to do”, practices financial planning at Mortgage Logic, 1793 Portage Ave., Winnipeg, MB. (204) 298-2900