Cheap Life Insurance Has Many Drawbacks

If you're here, at my site, it's because you're looking for cheap, inexpensive insurance. I know this, because I targeted as the main keyword, and you found it on a web search. I've done this for a reason – there are lots of web sites trying to get you to visit them for cheap insurance. I'm here to tell you about effective life insurance, and sometimes, that isn't cheap.

Life insurance is a product; like all products in a competitive market place there are people trying to compete on services, and on price – and presumably, based on what you entered to get here, you're looking for products sorted by price.

This isn't a rate comparison site. This is about what life insurance does (and does not do) and why different life insurance policies (whether "cheap life insurance" or not) meet different needs. I'm not trying to sell you anything – I'm trying to educate you before someone else tries to sell you something you don't need.

Now, I'm going to keep sprinkling "cheap life insurance" through this article – it helps pull people here, but for the most part, cheap isn't the term you want to use when looking at life insurance. You're looking for insurance that will provide for your family if you can no longer afford to provide for them. Your family is the most important thing in your life, and while they'd rather have you than any insurance settlement, you need to know they're provided for.

And that's where cheap life insurance falls down. You see, the companies that sell cheap life insurance aren't really in the insurance business; they're in the "commission generating" business. Always investigate the credentials of your insurance carrier. Yes, the national providers (like Met Life, and New York Life, and AFLAC) are more expensive. But they also pay out their policies, without forcing your survivors to jump through flaming hoops of bureaucracy. They also don't generate reams of complaints from state insurance regulators.

Once you've picked a company (or suite of companies) you're willing to trust, it's time to realistically assess what you need for coverage. First and foremost, most insurance companies are going to try and sell you a product called "whole life" insurance – your premiums (which are higher) are vested in a savings program which matures and pays out when the policy expires.

Whole life policies are used by insurance companies to get more money to seed into their investments; insurance companies invest in VERY conservative, safe markets (they need to preserve assets in case they have to pay out). What this often means is that whole life policies, as investment vehicles, are poor performers. They have a few tax advantages, and provide a way to shelter some income, but before you invest in a whole life policy as a retirement package, talk to your agent about other financial services options (most good insurance agents can also direct you to good investment advisors, or can bundle annuities into your policy.) The sad reality is that a lot of whole life insurance policies – particularly those peddled by people selling "cheap life insurance", pay out less than you'd earn by buying a term life policy and investing the difference into a set of certificates of deposit every month.

In most cases, you're better off buying what's called a term life insurance policy. This has a monthly premium and covers you for a specific amount of money over a specific amount of time, with terms ranging from 5 years up to twenty. If you're investing in retirement, take the difference between a term and a whole life policy and invest it in a Roth IRA or a 401(k) first.

The principal drawback of term life insurance is that it's not always available; you have to get a medical exam, and you have to qualify for coverage under the policy, and the price of the policy rises as the odds of your dying increase. Where whole life policies make their comeback is when you have someone who is otherwise priced out of a term life insurance market; because the insurance carrier is getting extra income (from the higher premium, and from their fees on the investment management), they're far likelier to waive details like a full physical.

One way to get cheap life insurance from a reputable broker is to bundle it with other policy options, like fire, flood, home owners or auto insurance. Indeed, the place where most insurance consumers make painful mistakes is by focusing on the lowest price for each component of the policies, and buying them from different brokers, rather than establishing a good working relationship with their agent and seeing if a bundled package is worthwhile.

Likewise, when buying any insurance policy, understand that as you age, policies do get more expensive. On the other hand, as you age, your total assets tend to increase, meaning the amount of coverage you absolutely need goes down. The general rule of thumb when pricing out policies is to try to make your policy worth at least seven years worth of your current income, plus half of whatever balance you have on your mortgage.

When shopping for a carrier, look at the services the provider carries (not annuity returns, but how many agents they have, how many complaints have been filed, and their general reputation). This tells you how responsive they are – there's a minimum threshold for effective coverage, based on how many people live in your area, and based on their age and demographics.

Life insurance is a complex product – but the principles of it are simple: You get what you pay for, and when your dependents need it, they need fast, sympathetic service with a minimum of hassle. Forgo the siren song of cheap life insurance and buy from a reputable vendor, like AFLAC, Met Life or New York Life.

For more information on Cheap Life Insurance, check out our Q&A

Return From Cheap Life Insurance Has Many Drawbacks to Home Page