Finding a Low Cost
Life Insurance Policy
After you have decided which kind of life insurance
fits your needs, look for a good buy. Your chances of finding a good
buy are better if you use two types of index numbers that have been
developed to aid in shopping for life insurance. One is called the Surrender
Cost Index and the other is the Net Payment Cost Index.
It will be worth your time to try to understand how these indexes are
used, but in any event, use them only for comparing the relative
costs of similar policies. LOOK FOR POLICIES WITH LOW COST INDEX NUMBERS.
What Is Cost?
Cost is the difference between what you pay and what you get
back. If you pay a premium for life insurance and get nothing back,
your cost for death protection is the premium. If you pay a premium
and get something back later on, such as a cash value, your cost is
smaller than the premium.
The cost of some policies can also be reduced by dividends; these are
called "participating" policies. Companies may tell you
what their current dividends are, but the size of future dividends is
unknown today and cannot be guaranteed. Dividends actually paid are
set each year by the company.
Some policies do not pay dividends. These are called guaranteed cost
or nonparticipating policies. Every feature of a guaranteed
cost policy is fixed so that you know in advance what your future
cost will be.
The premiums and cash values of a participating policy are
guaranteed, but the dividends are not. Premiums for participating
policies are typically higher than for guaranteed cost policies, but
the cost to you may be higher or lower, depending on the dividends
actually paid.
What Are Cost Indexes?
In order to compare the cost of policies, you need to look at:
-
Premiums
- Cash values
- Dividends
Cost indexes use one or more of these factors to give you a
convenient way to compare relative costs of similar policies. When
you compare costs, an adjustment must be made to take into account
that money is paid and received at different times. It is not enough
to just add up the premiums you will pay and to subtract the cash
values and dividends you expect to get back. These indexes take care
of the arithmetic for you. Instead of having to add, subtract,
multiply and divide many numbers yourself, you just compare the index
numbers which you can get from life insurance agents and companies:
-
LIFE INSURANCE SURRENDER COST INDEX
This index is useful if you consider the level of the cash values to
be of primary importance to you. It helps you compare costs if at
some future point in time, such as 10 or 20 years, you were to
surrender the policy and take its cash value.
-
LIFE INSURANCE NET PAYMENT COST INDEX
This index is useful if your main concern is the benefits that are to
be paid at your death and if the level of cash values is of secondary
importance to you. It helps you compare costs at some future point in
time, such as 10 or 20 years, if you continue paying premiums on your
policy and do not take its cash value.
There is another number called the Equivalent Level Annual Dividend.
It shows. the part dividends play in determining the cost index of a
participating policy. Adding a policy's Equivalent Level Annual
Dividend to its cost index allows you to compare total costs of
similar policies before deducting dividends. However, if you make any
cost comparisons of a participating policy with a nonparticipating
policy, remember that the total cost of the participating policy will
be reduced by the dividends, but the cost of the nonparticipating
policy will not change.
How Do I Use Cost Indexes?
The most important thing to remember when using cost indexes is that
a policy with a small index number is generally a better buy than a
comparable policy with a larger index number. The following rules are
also important:
-
Cost comparisons should only be made between similar plans of life
insurance. Similar plans are those which provide essentially the same
basic benefits and require premium payments for approximately the
same period of time. The closer policies are to being identical, the
more reliable the cost comparison will be.
- Compare index numbers only for the kind of policy,
for your age, and for the amount you intend to buy. Since no one
company offers the lowest cost for all types of insurance at all ages
and for all amounts of insurance, it is important that you get the
indexes for the actual policy, age and amount which you intend to
buy. Just because a "shopper's guide" tells you that one
company's policy is a good buy for a particular age and amount, you
should not assume that all of that company's policies are equally
good buys.
- Small differences in index numbers could be offset
by other policy features, or differences in the quality of service
you may expect from the company or its agent. Therefore, when you
find small differences in cost indexes, your choice should be based
on something other than cost.
- In any event, you will need other information on
which to base your purchase decision. Be sure you can afford the
premiums, and that you understand its cash values, dividends and
death benefits. You should also make a judgment on how well the life
insurance company or agent will provide service in the future, to you
as a policyholder.
- These life insurance cost indexes apply to new
policies and should not be used to determine whether you should drop
a policy you have already owned for awhile, in favor of a new one. If
such a replacement is suggested, you should ask for information from
the company which issued the old policy before you take action.
