The cheapest term life insurance policy may not be the best for you

There are many websites with term life insurance quote engines which may help you find the cheapest term policy. However, the cheapest is not always the best.

Let’s start with some basics. In general, life insurance falls into two categories: term insurance and permanent insurance (cash value life insurance). Each category includes different types of insurance. There are nuances between them. It is too complicated to cover everything in one article. I will just focus on the most popular type of term insurance, i.e., the level term insurance. If you are interested in learning more about other types of life insurance, you could read the “Life Insurance Buyer’s Guide” from the National Association of Insurance Commissioners.

What is the level term life insurance? It provides level death benefits throughout the term with guaranteed level premiums. The common terms are 10, 15, 20 and 30 years. Different types of life insurance are for different purposes. In my opinion, the level term insurance is the most affordable life insurance you could get for income replacement purpose. For example, for a 30-year old man with perfect health living in California, the lowest premium for a 30 years’ level term policy with $500,000 coverage costs only $380 per year through Protective Life Insurance Company at the time of this writing. You will get the same number if you go to any online term quote engines. However, it may not be the best option for you. Here is something else you may consider.

  1. Conversion options

    Some of the level term policies allow you to convert it to a permanent policy within a certain period (usually the earlier of the term period or age 70) without doing another round of medical underwriting. In other words, you could get the same health rating on your permanent policy even your health is no longer as good as it used to be.  Some of them even give you some discount on the permanent policy’s first-year premium if you convert earlier. It is called conversion credits. Not all level term policies have the conversion options, and some of the insurance companies even have two level term products with and without this feature. Obviously, the one without it will be cheaper.

    Besides the conversion period and the conversion credits requirement may differ between policies, another important caveat is that you usually could only convert your term policy to certain types of permanent policies offered by the same insurance company. An insurance company with good term products doesn’t necessarily mean that they have good permanent products. Even if they do, they may not give you their best one to convert it to.

    Back to our example mentioned above, the cheapest policy for men in their 30s has very limited conversion options after year 5. For those who may have potential needs for a permanent policy in the future, you could give it another thought.

  2. Comdex scores

    A life insurance policy is basically a contract based on the promise of the insurance company. So the financial strength of the insurance company is also very important to you, especially if you are looking for a term policy with longer term. There are a couple of different rating systems from each rating agency. The most widely used one in the insurance industry is the Comdex scores because it is a composite ranking system based on the ratings from four major rating agencies including A.M. Best, Standard & Poor’s, Moody’s and Fitch. The score scale from 1 to 100 and the higher, the better. A company with a score of 90 is better than 90% of the other insurance companies on the list.

    Do not assume that a well-known company always has a higher Comdex score. For example, American General Life Insurance which is owned by AIG only has a Comdex score of 81 at the time of this writing compared to a less known company called Banner Life Insurance Company with a score of 94. And the premium difference between these two companies in our example above is only $5 a year.

  3. Health and lifestyle requirements

    When you apply for a life insurance policy, insurance companies will rate you into different health rating class based on your health and lifestyle. The rating class will affect the cost of your insurance. And each insurance company has its own rating classes and medical underwriting standards. For instance, a slightly overweight may disqualify you for the best rating class with one company, but might be acceptable to another company.

    The insurance company with the lowest premium under one rating class may not be the same under another class. Also, one company’s term policy under a higher health rating class is usually cheaper than another company’s policy under a lower class. Back to our example, the protective policy under the second-best rating class costs $480 per year which is more expensive than any top 20 policies on the list under the best rating class.

    Certain online term quote engines have some additional tools available to refine your quote results by asking for your basic health information. It is a good start for those with perfect health conditions but usually not good enough for others.

Frankly speaking, you may not be able to find some or even all the information above regarding your specific situation without talking to an experienced insurance agent. Even though I learned a lot about these things through my previous experience, I still need to partner with a highly experienced insurance agency to find the best but may not be the cheapest policy for my clients. Why? The things I am going to tell you may surprise you. Firstly, at least one licensed insurance agent will be involved and get paid in every life insurance transaction no matter you do it online through those websites or at a local insurance agent’s office. Secondly, you won’t get any discount on your term policies even if you apply for a policy online without talking to any insurance agents.  You will be paying the same built-in sales charges and commissions on the term policies regardless of whom you buy the policy from. As an independent fee-only financial planner, I do not sell any insurance products or get compensated through any sort of profit sharing agreement with any insurance agents. I make an insurance recommendation to my client based on his/her overall financial picture, and it is up to the client to decide whether to implement it and how to implement it.  By partnering with an experienced insurance agency, I will not ask for more money from the clients but rather provide further expertise and convenience to them.

By the way, I did my due diligence on the insurance agency for my clients, and you should do the same when you are trying to find a local insurance agent for yourself. Learn more from my previous blog “What should you know before getting a professional to help you manage your personal finances”.


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