The Cost Of Life Insurance
A Complete guide
By James Tobin, CFP®
Expert Review Of The Cost Of Life Insurance
Jim Tobin, CFP®
Why you can trust this review
At Bequest Mutual Life Insurance, we value our editorial independence. We keep our reviews strictly factual so you can use them to make informed decisions. Life insurance carriers referred to on this site do not approve reviews.
Are you interested in protecting your family but wonder about the cost of life insurance? Asking "How much will life insurance cost me"?
If so, you have landed in a good place. This article will discuss how much life insurance costs, the inputs that drive the cost, and how to keep that amount as low as possible.
How Much Will Life Insurance Cost?
The unsatisfying answer to that question is that it will depend on your circumstances. You can experiment with the quote tool and you will get accurate pricing. However, the accuracy is dependent on your inputs for health classification. The best practice is to look at a range of health classes.
The major cost inputs are discussed below with tips to minimize cost whenever possible.
Type Of Life Insurance
The type of life insurance you apply for will play a significant role in the cost of the policy. As you go over the options feel free to click on the links for more in depth discussion of the linked subject.
Just click the button of the type of life insurance that interests you and scroll to that area.
Cost of Term Insurance
Term life insurance is the least expensive per benefit dollar of the life insurance options in the market. Not surprisingly, these affordable prices often come with stricter health underwriting guidelines. However, so called "no-exam" policies are becoming more and more available and competitively priced.
Click the link for an in depth look at term life insurance options.
Below are some samples of term life insurance pricing for males and females.
Monthly Rates for Males $500000 20 Year Term
Monthly Rates for Females $250000 10 Year Term
Cash Value Whole Life
In the most basic configuration, whole life insurance is coverage that last your whole life and has rates that do not fluctuate. The best use of while life insurance is for funeral expenses or as a savings vehicle.
Whole life policies that are designed as a savings vehicle are among the most expensive life insurance options. While health underwriting for these policies is only slightly less restrictive than term life policies, the savings component raises the monthly premium considerably.
While permanent policies designed for cash accumulation certainly have a place in the marketplace, they are not usually a favorite of the cost conscious consumer.
Properly designed cash value policies are customized for the policy owner. Therefore, pricing samples are generally not helpful.
Those considering cash accumulation whole life should ask for illustrations from 2-3 top-rated carriers.
Cost Of Universal Life Insurance
The cost of universal life insurance depends on the "flavor" or UL you buy. Universal life or UL is a form of life insurance with three "flavors" or variants; Guaranteed universal life (GUL), current assumption UL, and Indexed Universal life (IUL). These products serve different market segments.
In many ways universal life insurance is like whole life. It is designed to last for your whole life and can accumulate cash value. However, unlike whole life, the rates are not "locked in" and the flexibility that can be achieved comes at the cost of the rock solid guarantees associated with whole life. In the past this issue has been the
The cash build up consists of a part of the premium that is designated as savings in a side account. This money is conservatively invested by the carrier and the policy has a guaranteed interest rate of return. The inherent risk of a universal life policy is that the increased insurance costs outpaces the a growth and the policy owner is then obligated to make up the shortfall out of pocket
Index Universal Life Insurance (IUL)
With a basic cost structure that does not differ from current assumption UL, indexed universal life is a relatively new product that has performed quite well over the last decade and a half. The basic premise of an IUL is the same as current assumption UL accept that instead of current interest rates, the IUL is based off equity indices like the S&P 500.
However, unlike the stock market, the policy does not lose money based on poor stock performance. This "magic" is performed by the carriers investing mostly in bonds and then buying & selling stock index options. The end result being that when the market is up, the policy gets a share of the upside....and when it is down, the policy breaks even (minus administrative expenses), based on the bond income.
Burial Insurance or "Final Expense"
While not technically a different "kind" of life insurance, "final expense" gets its own category because the lenient health underwriting increases the pricing dramatically.
With death benefit face amounts that range from $5000-$100000, the simplified issue or "final expense " life insurance market is mostly made up of whole life insurance products. However, there several policies that have components of term policies starting to emerge. Make sure you know what you are buying!
Whether term or whole life, the calculation of the death benefit depends on if the policy is first-day coverage or graded
First day policies are straightforward, and provide a full death benefit from day 1 of the policy.
Graded policies use a two or three year period in which the benefit increases to the face amount over the contractual time period.
These policies commonly pay premiums plus interest if you die in the first year of the policy; 30-50% if you die after one year but before two; and full face amount after two years.
The carriers offer graded policies based on the applicant's health. These provisions are a way for the carriers to provide coverage while limiting their risk.
Graded or not, a whole life policy has a fixed premium that cannot increase and the policy stays in force until the premiums stop being paid or the insured dies.
In addition to different underwriting standards, final expense pricing is complicated by the fact that a lot of providers only operate in certain states. As a result the samples below are of limited value.
Male $25000 "Final Expense" Whole Life 1st Day Coverage
Female $15000 "Final Expense" Whole Life 1st Day Coverage
Alternatively you can use the final expense quote tool found here.
Guaranteed issue life insurance policies are he most expensive policies available. Guaranteed issue policies certainly have a place in the marketplace, but they should be delegated to "last resort" status.
With only the requirement of age (depends on the carrier) and citizenship, guaranteed issue life insurance policies have a death benefit that ranges from $5000-$50000. Such plans are exclusively whole life insurance.
However, all guaranteed issue policies are "graded". Generally, the grading represents a 2 or 3 year period that the policy must be in force before a full death benefit will be paid.
Like "final expense" policies, guaranteed policies use a two or three year period in which the benefit increases to the face amount over the contractual time period. These policies commonly pay only premiums plus interest if you die if you die before the end of the "grading" period. (2-3 years depending on carrier). After the grading period ends, the carrier would pay the full face amount.
Also, like the "final expense" write up says, these provisions are a way for the carriers to provide coverage while limiting their risk. You can read more about "final Expense" coverage here. Below are some sample rates for guaranteed issue life insurance.
Male Monthly Rates
Female Monthly rates
No Exam life Insurance
No exam policies are becoming more and more competitive with fully underwritten options. The days of dramatic premium hikes for "no exam" options are largely over.
No exam or "no-med" policies are not technically another "type" of life insurance. However, because the para medical exam has been such a big part of the life insurance business in the past, the changing landscape needs to be addressed.
Simplified issue burial and guaranteed policies are already no exam. However, traditional term and permanent policies are beginning to use no exam options.
While these policies are still medically underwritten, using your medical records and answers to questions, they no longer require blood and urine. This is a welcome change as it helps avoid "surprises" as well as saves time.
Your Age And The Cost Of Life Insurance
Backdating Life Insurance Age
In most facets of your life "your age is your age". That is, there is not much you can do change how the number is viewed. However, when it comes to the cost of life insurance, there is a nuance that is worth discussing.
The first is what is called "saving age". "Saving age" refers to the practice of backdating a policy (usually up to 6 months) and paying the premiums for those months. This option allow you to use the pricing chart is attached to your earlier age.
Deciding if "saving age" is worthwhile for you is a simple mathematical exercise where you take the difference in policy cost of the two ages and the cost of the back premiums and compare. This option can be helpful at "milestone" birthdays like age fifty or sixty.
For example take a look at the table showing monthly 20 year term rates for a standard rated male at ages 49 and age 50.
If the applicant was 2 months past his 50th birthday he would have the option of paying an additional 259.54 (129.77 x 2) to keep his policy age at 49. If this option is chosen, He would recoup the additional payment in under 22 months. Probably not a bad decision, considering that the policy would still be in effect for another 18 years. This would save over 2600 over the life of the policy.
Younger Applicants Save Over Time
As the "saving age" example demonstrated the earlier you obtain life insurance the less expensive it will be. This truism multiplies with health concerns added into the mix.
While paying extra to save your previous age is often the smart financial move, the smarter move is to get the insurance at the younger age and avoid the hassle.
The Effect Of Health On The Cost Of Life Insurance
Health condition is a primary driver of the cost of life insurance. Simply put, life insurers face less risk from healthy people, and this lessened risk is reflected in the pricing. However, the type of insurance you are applying for and the risk appetite of the carrier will have a material impact as well.
Type of Insurance
Term insurers will have 4-5 classes plus 8-16 table of substandard class. This allows for "nit-picky" underwriting at times. Cash accumulation permanent policies (and GUL) us the same model with a slightly more forgiving application. The difference in pricing between classes can be significant with substandard "tables" adding 25% per table to the standard rate. Read more about "table ratings" here.
Burial or "final expense" life insurance does not use the same model. Rather, burial insurance starts with pricing that allows for impairments that would be equivalent to table 4-6. Therefore, your only reward for being healthy with burial carriers is not to be forced into a graded product. Graded policies payout the full death benefit only at the conclusion of the "graded" period. Deaths occurring prior to the conclusion of the grading period will be paid a percentage based on the amount of time lapsed.
Guaranteed issue life insurance is not concerned with health in regard to pricing. However, they are interested when it comes to the death benefit. death benefits are paid on a graded basis on all guaranteed issue policies. so, depending on the carrier, you will not recieve the whole death benefit unless the insured lives past the 2-3 year graded period.
A carriers appetite for a specific type of risk is reflected in stricter or more lenient underwriting. For example if Prudential is less concerned with sleep apnea than John Hancock, this preference will show in the form of a better underwriting class. It is in this way that risk appetite is reflected in the cost of term life insurance.
This same process plays out in the senior market with burial products. Where one carrier will view insulin dependent diabetes as a "knockout" or graded condition, others will not. This is a case of the carrier using risk preference to reflect pricing.
If you have an existing health condition, the best practice is to work with an experienced professional to make sure you are applying with the carrier most likely to view your condition in the best light.
The Effect Of Amount Of Coverage Has On Life Insurance Cost
Much like an applicant's age, the amount of benefit requested would seem a pretty straightforward matter.
Life Insurance Banding
While this observation is true for the most part, there are times when nuance comes into play. The nuance centers around the concept of "banding", the industry practice of segregating policies by 100k and 250k increments.
The perverse net effect of banding is that increments at the band level tend to be less expensive than benefit amounts that are just below the band increment amount.
As you can see, although the cost difference is not great, you get $15000 more benefit for less premium. So it makes sense to compare your your benefit need with the price at the next band. You may get some free life insurance.
Avoid the Cost of Buying Too Much Life Insurance
One of the most simple ways to avoid spending too much money on life insurance is to make sure your not over insuring yourself. Over insurance happens primarily due to decreasing or eliminated obligations such as mortgage or college expenses. This can be addressed by the laddering of multiple policies. Laddering is addressed in the next section on term lengths.
A simple and effective method to calculate the correct amount of life insurance you will need is to use the L.I.F.E. formula. L.I.F.E. takes into account your outstanding obligations (Loans) your Income and your Future Expenses (like college). You can see an in depth discussion of the L.I.F.E. formula on the choosing terms for life insurance page.
The Effect Of Term Length On Life Insurance Costs
Whether your policy is a permanent contract or a temporary term policy, the period your policy is in-force will have a significant impact on how much your life insurance will cost. The cost curve is straight forward with permanent policies costing the most and term policies having a direct correlation between increasing in cost and increasing term lengths.
Standard Male Age 50
$ 250000 Death Benefit
20 Year Term Policy
As you can see the difference in price of term policies is significant. This difference stands to reason, as the 30 year policy will obligate the life insurance carrier until age 80. The increased age vastly increases the odds that the carrier will have to pay a claim, and this risk is reflected in the pricing.
As was mentioned in the last section, the cost of your life insurance can be lowered by laddering policies. Laddering policies is a way to insure your temporary or decreasing obligations without being tied to paying for the insurance once the temporary need (college, mortgage) is paid.
For example if an applicant chose to ladder 3 policies so that his life insurance decreased with planned life events such as his children's college graduation and his mortgage payoff, significant savings can be achieved. Let's take a look.
Age 40 Preferred Male Non Smoker
$ 300000 Benefit
$ 450000 Benefit
$ 250000 Benefit
$1000000 Death Benefit
In this example the insured has the expensive college education of his children- that will be complete within 10 years- insured for that period with a 10 year policy. He has 20 year policy covering the remainder of outstanding mortgage on the family home and he has a $300000 policy that will stay in effect for the entire 30 years.
In both cases the insured has $ 1000000 coverage for the first 10 years. However, in the laddering example he saves $29.55/mo. which comes out to $3546 over the 10 year period.
After year 10 the $450000 policy fall off (because hopefully the kids graduated) and the benefit amount goes down to $ 550000 at a monthly cost of $61.87. This represents a savings of 52.08 a month and $6249 over tghe ten year period.
After year 20 the $ 250000 policy falls off (hopefully the mortgage has not been refinanced) and the monthly payment falls to $39.99. This represents a savings of $ 21.88/mo. and a savings of $ 2625 over the final 10 year period.
All told, in this example the laddering formula saves over $ 12,400 over the 30 year period while still covering the insureds needs. Laddering is an excellent strategy to save money while still providing the needed life insurance.
How Much Do Riders Effect The Cost Of Life Insurance
Life insurance policy riders can be useful but they often come at a cost. Some of the most common riders available are:
- Waiver of Premium
- Conversion Privilege
- Child Rider
- Additional Purchase Option
- Living Benefits
Lets take a look at them one by one.
Waiver of premium
This rider has an added expense attached to it and will allow for your continuation of coverage should you become disabled and unable to work. Although there is additional premium attached to this rider, it is worth considering.
The convertibility rider allows for the conversion of a term policy to a permanent policy with no evidence of insurability. This rider is usually a built-in rider with no added cost. however, the product offering is often more expensive than offerings that do not carry the privilege. Like waiver of premium, this is one that is worth considering if the budget allows. It is an excellent hedge against the unknowable events of the future.
This is one of the most popular riders sold by life insurance carriers. The child rider has a cost associated with it and allows for insurance for the insured's children with no underwriting. The insurance stays in effect until age 21 and is convertible to a permanent policy. Although popular, this policy should only be taken in the case of a child with medical issues.
Additional Purchase Option
This rider allows for the purchase of additional life insurance at the same underwriting grade received with the original purchase. This rider has an additional cost related to it and, absent a specific plan, should be viewed as a "luxury" purchase.
The living benefit or accelerated death benefit rider allows for as much as 90% of the death benefit to be paid in the case of a terminal illness, chronic or catastrophic condition. These electable riders are becoming the industry standard and do not have an additional premium attached.
All in all, riders can be very useful to the insured. However, it is important that they be chosen carefully and not at the expense of having enough life insurance. The fact is that all that potential usefulness comes at the cost of increased expense.
The Effect Of Your Agent And Carrier On The Cost Of Life Insurance
Earlier in this article, the subject of risk appetite was discussed with regard to life insurance carriers, and how risk appetites are reflected in underwriting classification. The various, and ever changing, risk appetites of carriers is the primary reason why your agent can have a meaningful impact on the cost of your life insurance.
All of the areas touched on earlier, such as type of insurance, saving age, banding and laddering are subjects that an experienced agent is aware of, and can use to save you money. However, the best agents will have a knowledge and resources to place your application with the carrier who will look at your unique circumstance in the most favorable light.
For example an applicant looking for life insurance after having heart stent surgery would need the services of an agent that is well versed in insuring heart conditions. It would be important that the agent be aware that Banner prices "table ratings" off standard plus rates and the Prudential has a history of more lenient underwriting than many competitors. These are things the applicant is not likely to know, as most underwriting guides are nit available to the public.
The following case study from my post on life insurance with Rheumatoid Arthritis provides a clear example of why using an experienced agent is in your best interests.
Case Study Pricing Life Insurance With Rheumatoid Arthritis [RA]
Please see the case study below. It will show you why it is in your interest to have as many options as possible available when shopping for life insurance with RA or any other impairment.
Female Age: 43
$500000 20 Year Term
Well controlled mild RA. Diagnosed Age 34
NSAID only No Other Health Concerns
This looks like a best case scenario that would be either standard or Table 2/B or 4/D depending on the insurers appetite for a RA risk.. Let's take a look at the rates.
- Standard Rates
- Table 2 Rates
- Table 4 rates
$ $ 65.79
This table which shows only a few of the major life insurance companies available illustrates the difference in rates. For standard rates Prudential is 33% more expensive than Protective.
On it's face this seems like a pretty straight forward choice and if underwriting grades between carriers is the same, it really can be that simple.
This kind of easy price shopping is particularly useful for younger folks in good health and demonstrates why you want to use an independent Agent.
For people who suffer from RA or any other serious diagnosis, it gets much more complicated.
Because life insurers manage their appetite for specific risks by being more lenient or more stringent with underwriting grades, you need to know which company will grade you a standard or table 2 risk and which one's will grade you as table 4-6.
In the case above Prudential (the most expensive standard rate) is likely to be the best deal because the more competitively priced carriers will likely rate the risk table 4 while Pru might well go standard.
This is something you can't know by simply looking at the lowest price. In this case using an independent agent could save you 15% (the difference between Prudential @ standard and Banner @ Table 4).
* Note that while overfunded ?investment grade" permanent policies are excluded from this review, such policies generally follow the term life insurance guidelines.
It's worth noting that a few of the prominent carriers that offer these products have "healthy lifestyle" credits that "table shave" ratings by as much as 2 tables.
For example, a atrial fibrillation case that was rated table 2/B could be "table shaved" back to a standard rating. Table shaves are not offered on term products.
Your Next Steps In Looking For Affordable Life Insurance
Now you know that their are several tips and tricks to keep the cost of your life insurance within your budget. I hope that this article is helpful to you in obtaining affordable coverage. I certainly hope that you will consider using Bequest Mutual as your agency in shopping for the best deal. We promise to make the process as transparent and hassle free as possible. You can take a look at the process here.
If after considering all the cost lowering tips and tricks you are still concerned that life insurance will not fit comfortably into your budget, I would advise considering being a little a shorter term or lower benefit amount. After all in a crisis something is far better than nothing.
Remember, life insurance can cost as little as a Friday night pizza. Ask Yourself "is the budget really that tight"?