As the nation enters the second year of recession, families are taking a close look at their budgets to find expenses to cut. And while life insurance may seem like an easy place to save a few bucks, letting a policy lapse may be trading long-term security for short-term savings.
"The dangerous thing about tough times is that things that don't seem critical get pushed aside," says Byron Udell, founder and CEO of AccuQuote, an online insurance broker and comparison service based in Wheeling, Ill.
Udell says trimming expenses like dinner out is one thing. "But with life insurance, you are taking a big risk by letting a policy lapse," he says.
So rather than cutting your coverage, consider these cost-saving moves instead:
1. Shop around
People are living longer now than they ever have, and insurance companies have taken notice. Since the mid-1990s, insurance companies across the nation have begun using new actuarial charts that reflect those longer life spans, which translates to lower life insurance rates.
That means that if you bought a policy in the years before the change, your rate is probably much higher than it needs to be.
"Most people who have term life policies are overpaying," Udell says. "Rates have come down dramatically in the last 15 years."
He says that in the mid '90s, a man in his 40s would pay $995 a year for a $500,000, 20-year policy. "And that was a terrific rate," Udell says.
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Today, that same policy would likely cost just $350 a year -- less than half the cost.
"Now, you have to keep in mind, that same customer isn't 40 anymore, and so his rates would be higher, but the point is that rates have come down dramatically," he says.
Steven Weisbart, vice president and chief economist for the New York-based Insurance Information Institute, says the best answer for most people is to shop around. And because you don't have to cancel your existing policy to do that, comparing rates is risk-free, he says.
"Shopping costs you nothing but energy and time," Weisbart says.
Comparing rates especially makes sense if you didn't get one of the top rankings with your original policy, he says. That's because along with the longer life spans, many insurance companies also are taking into account developments in medicine over the last few decades when they price a policy.
"People who died of a condition years ago now live with it for years," he says.
So if a company wouldn't even consider you for coverage years ago, you may qualify today.
On the other hand, if your health has slipped significantly or if you have put on more than a little weight or have taken up smoking since you first bought your policy, you might do best by sticking with the old insurance, Udell says. That's because even with the lower rates, you may not qualify for the best coverage anymore.
2. Get the right size
If you are desperate to squeeze down your insurance costs, one option may be to reduce the amount of coverage you have.
"It's not the best solution, but it's better than dropping it altogether," Udell says.
Going with a smaller policy will reduce your premium, but the danger is twofold. First, if you were to die, your family may not have enough to replace your income. And second, once your finances improve, your health may not be as good, and that would mean you may have trouble getting that coverage back without having to pay an arm and a leg.