When is the best time to buy life insurance? - One of the more frequent questions surrounding life insurance is ‘When is the best time to buy?’ As a fee-only financial advisor, I no longer sell life insurance but was previously licensed to sell life insurance in all fifty states. I am also a Chartered Life Underwriter (CLU) which is the highest-level designation available in the life insurance industry.
My experience with clients and prospective clients has been that people usually wait to purchase life insurance until they feel they need it. This ‘need’ usually involves a life event such as getting married, having children, or losing a job. While this approach is beneficial in that you are not paying for coverage before you feel that you need it, the big drawback is that when you do decide to get coverage it is typically more expensive than when you were younger and you run a higher risk that you could be placed in a substandard rate class or denied all together.
A past client’s story is illustrative here. I worked with a dentist who was diagnosed as a Type I diabetic in his late twenties. The good news is that he bought a little bit of coverage in dental school - the bad news is that it wasn’t enough to cover a growing income, a wife who didn’t work outside the home, and three young children. While he was still insurable, the dentist had to pay substantially more in premiums than he would have, but for the diabetes.
Rather than the ‘wait until you need it’ approach, my contention is that you should buy a policy as soon as practicable. For most people, this means when you get your first full time job after completing your education. While insurance companies will typically write policies on children or college students, underwriting often imposes restrictions on both the type of policy that can be purchased as well as the size of the policy.
As you shop for life insurance, here are a few things to keep in mind:
- Buy more coverage than you feel you need, especially if you see things like buying a home and starting a family in the future. Term insurance is very inexpensive for someone purchasing in their twenties. You do have to jump through some hoops such as having a blood draw, giving a urine sample, and providing your medical history. If you’re going to go through these steps, you might as well buy a large enough policy to last you for a while, rather than one you’ll have to replace in a couple years (and go through the underwriting process all over again).
- If you’re healthy and a non-smoker, it might be cheaper to buy a stand- alone policy than to take it as an employee benefit. It is common to take life insurance from your employer as an employee benefit because it is as easy as checking a box during open enrollment. Also remember with employer policies, is that they usually go up in price every five years. What’s cheap now becomes more expensive, especially when you enter your 40’s and 50’s. The final thing to keep in mind on this point is that a policy that you buy on your own will stay with you, regardless if you change employers or become self-employed.
- While each life insurer prices and underwrites their policies a little differently, in general terms the cost of waiting is a slight increase in prices up until age 35. At the 35 the premium increases become noticeable, and at 45 those increases will be even greater. As such, the cost of waiting until your mid 30’s to buy life insurance is not so much based on age, but on a greater chance that the rate classification you’ll be eligible for won’t be as good as one you would have qualified for at a younger age. This can be due to things such as weight gain, higher cholesterol levels, having a medical condition, or having a parent or sibling be diagnosed with a serious medical condition.
- Make sure that any Term policy you choose has good convertibility options. Most term insurance now is what’s referred to as ‘level’ term coverage – meaning that the monthly premium will stay the same for however long a term is chosen when the policy is initially purchased. At the end of that level term, you can either:
- Drop the policy altogether if you no longer need coverage
- Pay the astronomical renewal premiums for a term policy
- Apply for a new term policy, based on your age and your health at that time
- Convert your policy to a permanent, cash value policy. The benefit of converting to a cash value policy is that it locks in the rate class you were at when you originally purchased the policy, even if your health has deteriorated.
- A good resource to check out term life insurance pricing is www.Term4sale.com. I’ll post another time on places to buy life insurance from.
While this posting primarily discusses term insurance, I’m planning on including future postings to include a discussion of when to opt for permanent insurance instead of term.
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