How is life insurance sold?

You can buy life insurance either as an “individual” or as part of a “group” plan.

Individual Policy

When you buy an individual policy, you choose the company, the plan, and the benefits and features that are right for you and your family. You might be able to buy the policy from the same agent or company representative who sells you property and liability insurance for your home, auto or business. And although you won’t qualify for any discounts by buying your life insurance and other insurance from the same representative, working with a single advisor for all your insurance needs can make your financial life simpler.

Individual policies are typically sold through insurance agents or brokers. If you buy a policy through an agent or broker, you will pay a commission, also called a “load,” that is built into the premium rate. The commission compensates the agent or broker for the time spent advising you on how much and what type of life insurance to buy, for facilitating the application process, and for any further service that’s needed in future years to keep the policy up-to-date (such as changing beneficiary designations, arranging policy loans or coordinating your financial plans with your lawyer and accountant).

There are two other ways to buy individual life insurance. In Connecticut, Massachusetts and New York, you can buy it from a savings bank. Or you can buy a policy directly from an insurance company or from a fee-only financial advisor—what’s known as a “no load” or “low load” policy. Although there is no sales commission on these policies, the company will still have charges built into the premium to cover its marketing expenses, application processing expenses and subsequent services. Finding an insurance company that will sell you a no-load policy isn’t easy; typing in “no load life insurance” on Internet search engines will in many cases lead you to an agent or broker.

Group Policy

You might have life insurance automatically from your employer; many large companies do this. Your employer also might offer you the chance to buy additional life insurance under a group policy. And you might be eligible to buy life insurance under a group policy from a union or trade association or other group you belong to (such as a college alumni association or an automobile club).

Compared to buying an individual life insurance policy, there are several advantages to buying life insurance under a group policy:

• Group purchase can sometimes offer you a lower rate for a given death benefit either because the employer or other group sponsor subsidizes the premium or because the rates are averages weighted by people younger than you.
• There are virtually no health qualifications for getting the group coverage.
• Premium payment is usually by payroll deduction (for employer-based group coverage) or linked with other payments (e.g., credit card bills), lowering the chance of missing a payment.

Most employer group plans are term insurance, but if you leave that employer your state may require that you be allowed to convert the policy to a form of whole life insurance with the same insurance company that provides the group life insurance. You would then pay premiums directly to the company and keep the insurance in force. This can be an advantage if you are older, or have experienced deteriorating health, as it gives you the opportunity to qualify for whole life insurance without having a medical exam.

Credit Life Insurance

Credit cards and lending institutions may offer life insurance to pay off your outstanding loans in the event of your death. This is generally made available in two ways:

1. As part of the loan at no extra charge. In this case the cost of the life insurance is borne by the lender and is included in its interest rate or other finance charges. If you have this type of credit life insurance, you don’t need separate life insurance to pay off that loan if you die.
2. As an option at an extra charge. In this case, you should usually reject the optional coverage, provided that you have some other life insurance (group or individual) that can be designated to pay off the loan if you die. If you’re under age 50 and you don’t have other insurance that could pay off this loan, consider buying individual life insurance for this purpose as the rates will probably be better. At 50 or over (or younger with health issues), if you have no other life insurance for this purpose, the optional credit life insurance is likely to be cheaper than individual life insurance.

How to save money on life insurance

Buying the wrong benefits for a low premium does not add up to savings

Life Insurance

IN THIS ARTICLE

• Before you buy
• When you’re ready to buy

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There are ways to save money when buying life insurance, but they don’t always entail paying a lower premium immediately. As your top priority, look for a policy that meets your needs. Buying the wrong benefits for a low premium is a waste, not a saving. Beyond that, here are some ways to maximize your life insurance dollars. 

Before you buy

Once you’ve determined what type of life insurance product to buy:

1. Focus on financially sound companies. Dozens of companies sell life insurance. Limit yourself to companies with high ratings from two or more independent rating agencies. A low premium from a shaky company isn’t a good buy. See How do I choose a life insurance company? for more details.
2. Shop around to get a sense of the premium you’re likely to pay. Quote services on the Internet may serve this purpose, or you can ask an agent or broker to get you a premium estimate. As part of this research, determine which rate class you’ll fit into. Most companies that sell individual life insurance have several different price classes—usually called “preferred (non-tobacco),” “standard (non-tobacco),” “preferred (tobacco),” and “standard (tobacco).” A small percentage of people have health conditions or histories that disqualify them for even “standard” rates. Many in this group will be offered insurance at “impaired risk” or “nonstandard” rates.
3. Look into group insurance. Consider participating in your employer-sponsored life insurance program, even if you have to contribute to it financially. Employers often subsidize their group insurance costs, so it can be less expensive than individual life insurance. You might obtain coverage up to a certain level without providing evidence of good health, an advantage for some people. You’ll probably pay premiums through payroll deduction, which can be a nice convenience. However, make sure to compare group and individual rates, as depending on your age and health status, group insurance may or may not provide a savings. In comparing group to individual life insurance, remember that if you have over $50,000 of group life insurance, IRS tables determine how much it costs to provide the amount over $50,000 and charges you taxable income for that cost.
4. Take care of yourself. Find out into which rate class you’ll be grouped and, if necessary, consider making some lifestyle changes—don’t smoke, maintain a healthy weight and exercise regularly—to qualify for a more favorable rate class.

When you’re ready to buy

1. Shop around to get a good rate. Life insurance is a very competitive business, and you’ll find differences of hundreds of dollars (for annual premiums) even among financially strong companies for essentially the same policy.
2. Consider the net cost index. How can you compare two policies, one with premiums that start lower than the other but later are higher than the other? Or one with low premiums and a low cash value, the other with higher premiums and a higher cash value? Use a net cost index—a standard method for collapsing these variables into one number. The lower the number, the better, but ignore small differences (since the indexes are approximations based on assumptions, small differences might not signal true differences in values). The agent or broker with whom you’re dealing, or the company from which you’re considering buying a policy, will provide these index numbers.
3. Be aware of premium discounts for particular amounts of insurance. Most companies offer rate discounts for specified insurance amounts. For example, you might actually pay a smaller premium for $250,000 of life insurance than for $200,000, or for $500,000 of life insurance than for $450,000, because a discount “kicks in” at the higher insurance amount.
4. Beware of “fractional premiums”. Typically, you can pay your life insurance premium once a year, once every half-year, once a quarter, or once a month. Although paying quarterly or monthly might seem to be easier to fit into your budget, some companies levy high charges for paying premiums frequently. Others levy quite small charges to do this. If a company levies high charges for paying more frequently, try budgeting so that you can pay your premium only once or twice a year.
5. If you’re buying a term policy, look for renewal guarantees. A renewal guarantee gives you the right to start a new term after the current one ends, paying a higher premium based on your current age, but without requiring you to undergo a new health exam or submit any other “evidence of insurability.” Without the guarantee, you’d have to shop for life insurance all over again, and if your health has deteriorated, you might have to pay much more or not get it at all.

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