Cost of Life Insurance

I recently sat down with a newlywed couple in Rancho Cucamonga who wanted to know if it made sense to increase the amount of life insurance coverage to achieve their overall financial goals. They each showed me a policy that they purchased a number of years ago. I was surprised to see that each of them was paying about 30 percent too much for their coverage. Similar to gas stations and grocery stores, you will find cost variation, but 30 percent is too much of a difference. People work hard for their money and therefore, deserve to save it, spend it, or invest it. Here are some ways to suspect that you are overpaying.

Know about mortality trends

There are secrets about the insurance industry that everyone should know to ensure they have the best possible policy. This particular secret could potentially impact every person who owns a small term policy to a multi-million dollar permanent policy that is accumulating tax-free retirement income, and every policy between.

Life Insurance companies pay large sums of money to know to the greatest level of certainty the lifespan of males and females. Prior to strict legislation that held insurance companies more accountable, a small number of those companies unscrupulously overcharged their clients to pad their profits. In response to this act of greed, the industry developed a standardized pricing system for life insurance in 1958. This system was called the Commissioners Standard Ordinary Mortality Rates (typically referred to as CSO).

During the 50s people had shorter lifespans. This fact is important for insurance companies for obvious reasons. Consequently, people who purchased life insurance policies during that era had to pay a higher amount for their insurance.  Another mortality study was done in 1980 to reflect the changes in life expectancy. The most recent mortality study was conducted in 2001 which revealed that people were living even longer than the people in 1980. The CSO table in 2001 reflects a 30 percent reduction in the cost of insurance compared to the table in 1980.

A reduction of 30 percent means that you can purchase $130,000 of life insurance for the price of $100,000 or you can pay $70 for the same amount of insurance instead of $100. If you have the right kind of policy, you could take the extra $30 and use it for tax advantaged cash value accumulation.

Secrets of some Insurance companies

Every industry needs an agency to regulate unethical practices. Devoid of such an agency, a small number of individuals inevitably fail to resist the temptation to amass more profits. The same is true in the insurance industry. Specifically, the 1980 CSO tables were not enforced until 1989. To properly put this into perspective, let’s assume you are a business owner and you find out that a new procedure takes effect next January that will reduce your profits by 30%, but you are not forced to implement the procedure. How quickly would you integrate that practice into your business? Chances are you probably would not be in too much of a rush, would you? Neither were companies in the insurance industry.

Know how this secret impacts you

It’s January 1986 and you just made a New Year’s resolution to lose weight. On the 28th you see the Space Shuttle Challenger explode on television, which prompts you to protect your life against some unforeseen accident. If you purchased a life insurance policy in 1986, chances are the prices you paid was based on CSO table of 1958, nearly 30 years earlier. If you knew this secret, it would have saved you a ton of money because the rates in the late 50s cost 40 percent more.

In other words, if you invested $100 a month earning 6 percent annually for 30 years, you would have $94,869.82. If you invested $140 a month (40 percent more) earning 6 percent annually for 30 years, you would have $132,817.75 or $37,947.93 more.

Everyone knows they need life insurance, but the essential question is, are you overpaying for yours? I encourage you to look at your policy issue date to see if that is possible. Secondly, you might consider having a local insurance expert examine your policy. You may be leaving lots of money on the table that could benefit you greatly.