Save Money on your Life Insurance… Big Money

This is an intermediate level post. Today we are going to look at one of the greatest secrets in the life insurance business. Specifically we are going to look at Term Life Insurance.  The way it works (in a nut shell) is that you purchase a life insurance policy and pick a "term" – similar to a fixed rate mortgage in that for the duration of the term you pay a set amount which does not change.

Piggy_Bank.jpgLet’s start by looking at an example. Tim buys a term life insurance policy, he is 25 years of age, average health and wants $500,000 in coverage.  He chooses a 10 year term. For the first 10 years, his monthly premium is $28.76/month.  Not too bad for half a million in coverage. Now, at the end of the 10 years, we begin the NEXT 10 year term and according to the policy the monthly premiums are now $64.96/month for the next 10 years to reflect the increased chance of death for someone who is older.  Each successive 10 year period yields a higher premium, and exponentially so (since your probability of dying goes up exponentially as you get older).

Let’s look at an actual premium schedule I received from an insurance company:

Age 25-34     $28.76 Monthly Premium

Age 35-44     $64.96 Monthly Premium

Age 45-54     $137.96 Monthly Premium

Age 55-64     $325.50 Monthly Premium

So you can see that the cost rises exponentially with age.  So, here is the secret an insurance company will not want you to know: This premium schedule is based on the fact that they can only collect health information from you at the time of application (for private life insurance coverage).  If you qualify as average at time of application, they know that there is a chance that you will become sick, and that chance increases as you get older – SO THEY PRICE THAT INTO THE POLICY.  If you were able to go in at year 9 of every term and re-qualify with a medical assessment and show that you were still healthy, then you would save a lot of money.  Let’s look…

Assume Tim re-qualifies as "average health" at ages 34, 44, and 54.  So this means he goes and applies for a new 10 year term life insurance policy and hasn’t gotten sick.  This is what his new premium schedule becomes:

Age 25-34     $28.76 Monthly Premium

Age 35-44     $31.19 Monthly Premium (versus $64.96)

Age 45-54     $59.47 Monthly Premium (versus $137.96)

Age 55-64     $143.19 Monthly Premium (versus $325.50)

So what is the moral of this story? BEFORE YOUR TERM ENDS, APPLY FOR A NEW POLICY AND YOU WILL SAVE ROUGHLY 50% IN INSURANCE COSTS. Of course, this assumes that you re-qualify as healthy.  If you take the tests and find out you are sick, at least you know to hang on to your existing policy because it is more likely to pay out, and you will KNOW that you have a medical condition that requires attention.  And the sooner you get it looked after, the better the prognosis is likely to be. IN ALL CASES, MAKE SURE TO NEVER CANCEL AN INSURANCE POLICY UNTIL YOU HAVE THE NEW ONE SIGNED, SEALED AND DELIVERED.


Preet Banerjee
Preet Banerjee an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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  • Denise

    Shopping around for a more affordable term life policy is always a good idea, especially if you bought your policy more than a few years ago. However, be careful. Before replacing an existing term life insurance policy make sure you closely compare your existing term life insurance policy with the one you’re thinking of replacing it with. Keep in mind the following key points – price, guarantee periods, convertibility, applicable riders, if available and finally the financial strength of the new insurance company. When you buy a new term life insurance policy, a new contestability period starts (usually for the first two years). You should also be aware that suicide is not covered under a new contract (usually for the first two years). Most importantly, DO NOT CANCEL any existing coverage until the new term life insurance policy has been approved, paid for, and delivered to you. Before an existing policy is replaced, it should always be clearly determined that such a decision is in your best interest.

    Denise at AccuQuote

  • Joe@TLI

    Great points and suggestions to shopping for a new life insurance policy. Denise is also right, you’ll need to take the time to compare apples to apples.