Why Comparing Saves Pounds on Insurance Premiums
Americans are always looking for ways to cut their monthly budgets, and they sometimes get the bright idea to switch their current life insurance plans. It sounds like a logical move, but in fact it could be one of the worst decisions you make when it comes to your financial health.
Let's talk about why you should never compare life insurance quotes without considering the consequences.
It's a False Economy
Monthly budgeting is always a struggle for consumers, and when you start to look at how much you pay for life insurance and think, "Wow! I can save some big bucks if I go with another policy," the temptation is there to make a change. But when you compare life insurance quotes without considering the other factors involved in your current plan, it's like choosing to buy something based solely on price. You will most likely end up finding out that your decision was not only financially unwise but also caused you to sacrifice valuable policy benefits.
In many cases, consumers who compare life insurance quotes without understanding the differences in their current policies find out too late that they have under-insured themselves, leaving loved ones with a major financial burden after their deaths.
Let's look at an example.
A 31-year old woman is currently insured under a $500,000 whole life policy that was purchased when she turned 25 years old. Her insurance company informs her that she can switch to a new plan with an expense of $400 per month and still have the same benefits in place to protect her family financially in case of her death. She thinks this is great and immediately looks into it.
She finds out that she can get a policy with an expense of $390 per month. She thinks this is a great deal and switches over immediately to the new policy. But look at what happens after her death:
The new plan has a death benefit for the primary beneficiary of $350,000. This means that her family will receive less than half of that money, which means they will have to come up with a substantial amount of money on their own just to bury her. The first beneficiary receives nothing and the other two beneficiaries are left with just 17 percent of the benefit, barely enough to cover burial expenses.
Let's look at a more realistic example.
A 50-year-old woman currently has a $1 million whole life policy with an expense of about $4,000 per month. She wants to get a new lower budget deal and finds out that she can purchase a new plan with an expense of less than half as much, which means she can save almost $18,000 per year on her monthly insurance bill. She immediately asks her insurance company for details on how to get the policy down to that price point. After talking to her agent, the woman agrees on a new policy in which the death benefit is $500,000 for herself and the primary beneficiary receives $250,000. The next beneficiary gets nothing.
She tells her agent, "Great; I'm all set now."
However, the real shock comes when she receives her insurance bill after her death. Her new policy has a life income benefit of $375,000. So what happens is that she never paid for enough insurance to cover all three beneficiaries and leaves behind a family that is left with just $35,000 to pay for her funeral costs. The rest of the $250,000 will go directly to credit card companies and debt collectors because she left no estate plan.
In most cases, the amounts actually paid out by insurance companies over the years to cover deaths have been considerably less than the amounts reported as death benefits.
The Death Benefit Does Not Equal the Cost of Life Insurance
You can get a cheap life insurance policy, but that doesn't mean you're getting a good deal. You might be saving money on your monthly policy bill, but you could be underserving yourself and your family by not getting enough life insurance. Linking death benefits to cost is important because it tells you what you need to pay on your own to cover funeral expenses after your death. When you choose a policy with a lower cost, it means that all of your hard-earned money will go toward paying for funeral costs.
The following examples show how the cost of life insurance can be misleading.
Let's say a married couple is making annual salaries of $100,000 per year and has two children under the age of 18. The wife's salary is $50,000 per year and her husband's salary is $85,000 per year. Their combined annual income will be about $300,000 per year. Right now they have an existing whole life policy that they purchased when they were in their 30s. It has a $250,000 death benefit with an annual premium of $1,996 per year.
Now let's say they have the opportunity to switch to a new whole life policy with a death benefit of $500,000 and an annual premium of $1,450 per year. Right away they panic and think that this is too much insurance for their budget. But if we factor in how much money it takes to pay for funeral expenses after their deaths, it is more important that they have as much coverage as possible.
The couple currently has two children under the age of 18. They are planning on having at least two more children after their youngest turns 18 years old in 10 years. So, the wife is 40 years old and the husband is 45 years old. They have a 70 percent chance of living to their 70s and, if they do live to that age, there is a nearly 50 percent chance that one of the couple will be in ill-health when they reach 70 years old. Under this condition it is very likely that funeral expenses will cost at least $20,000 after the death of one or both of them, depending on their final illnesses.
After looking at these numbers, it's clear that these consumers should not switch policies because the cost savings would not be worth it in the long run compared with what's at stake. In this case, they should keep the existing policy and just pay the extra $74 per month to ensure their family's financial security.
Also, let's say a couple is making annual salaries of $100,000 per year and has a child under the age of 18 years old. The wife's salary is $50,000 per year and her husband's salary is $85,000 per year. Their combined annual income will be about $300,000 per year. They purchased an existing whole life policy when they were in their 30s for about $2 million with an expense that runs between $6,000 to $8,500 annually depending on the policy carrier or term length of the policy.
Conclusion
When it comes to planning for the future of your family, don't let cost be the only factor that you consider. You need to take time to do the proper research and make sure that you have enough life insurance coverage. Don't attach costs to death benefits because it will lead you to getting an inadequate amount of coverage.
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About the Author: Charles Rechlin is a registered investment advisor and founder/president of Thinkfire, LLC, a firm specializing in investor relations and financial communications consulting. Mr.