Avoid looking at insurance from the investment perspective. Life insurance is not an investment; the returns are simply not good enough. Its primary objective is to act as a financial safeguard for your dependents in the event of your death. In effect, you are saving for a rainy day. The annual premiums accumulate into a large sum over the years. This sum, in addition to the death benefit, will help tide over your beneficiaries in your absence. The costs should be viewed from this perspective.
Cost depends on coverage
The cost of any life insurance policy is determined by the amount of coverage you need. Instead of thinking about how much annual premium you can afford, consider how much coverage your family will need when you are gone. Your coverage amount should cover your family's day-to-day expenses while also paying off your existing debts and other financial responsibilities. End of life expenses-such as hospital bills not covered by health insurance and funeral costs-can also add up to a hefty sum. Your life insurance policy should ideally cover these costs as well. The greater your financial responsibilities, the greater will be the cost of insurance.
The type of policy you choose will also affect your overall insurance costs. For example, term life insurance is cheaper than whole life insurance. This is because term policies pay a death benefit only if you die during the term of the policy. However, since whole life policies are guaranteed to payout regardless of when you die, they charge you additionally for that guarantee.
Personal factors that push up costs
Young people pay lower premiums than older people do. This is because life insurance pays out on the death of the policyholder. A young policyholder is less likely to die, and therefore, more likely to continue paying premiums over a longer period. The insurer's risk of payout is lower than if the policyholder were older. This is why premium costs increase as the policy buyer gets older.
Good health also results in lower insurance costs. So do healthy activities. For instance, smokers pay a lot more than non-smokers do. If you are eager to bring down costs, quit smoking. Being overweight could also push up costs. You could use the possibility of lower premiums as an incentive to lose weight and improve overall health and fitness.
Some ways to cut costs
Your mode of payment could influence your annual premiums. Monthly premiums may seem easier to budget but you are likely to end up paying more each month. Opt to pay semi-annual or annual premiums if you are looking to cut costs.
A flexible policy may cost more at the outset, but it works out in the long-term. For instance, a renewable policy would allow you to renew your existing policy without undergoing a medical exam that might identify new health problems, which would then result in higher premiums. Bypassing this step ensures that your costs remain low.
Finally, there is no alternative to shopping extensively for good policies. Tip: Do not pick the policy with the lowest costs; pick the one with the highest benefits at affordable premiums.
Written By: Deepak Yohannan
The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal
For more articles by Deepak Yohannan, please visit MyInsuranceClub.com
You may write to the author at Deepak@myinsuranceclub.com