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Winning With Life Insurance

The cost of term life insurance is going up. To make matters worse, many companies are changing their underwriting standards, making it more difficult to qualify for low premium rates. Here's what you should do in response, and some advice from Early Show financial adviser Ray Martin on how much life insurance you need.

Life insurance is never a topic that people get terribly excited about. Planning for your own death is no fun, after all, and many delay the purchase. However, it is smart for most folks to have life insurance. And if you're going to buy it, you want to get the best possible price.

The cost of term life insurance (the plain vanilla policy that most people buy) is going up. Some companies already have raised rates, and others will do so by year's end, according to industry analysts. Basically, it's now costing insurance companies more to insure you, and they are passing the cost along.

AccuQuote.com, a company that provides online life-insurance quotes, expects term rates to rise 10 percent to 20 percent by the end of the year. The good news here is that rates currently stand at all-time lows. A $500,000 policy for a 40-year-old that cost almost $1,000 annually 10 years ago now costs about half that.

However, in addition to raising costs (or, in some cases, instead of raising costs), insurance companies are making it more difficult for consumers to qualify for low or "premium" rates. Receiving even the second-best rate can result in 25-percent-higher premiums. Some of the stricter standards include:

  • Family History: In the past, insurance companies wanted to know when your parents died and the cause of death. Now they are also asking about grandparents. And, particularly if a family member suffers from heart disease or cancer, they want to know if your family member experienced the onset of the disease before age 60. Even if your mother, for example, had breast cancer when she was 55 and is now 78 and healthy as a horse, you may no longer qualify for a premium rate.

  • Driving Record: Until recently, you fell into the lowest rate category if you had no more than two moving violations in the past three years. Now, many companies say that having more than one violation over three years puts you in a higher risk category.

  • Height/Weight Ratio: A 6-foot-tall man weighing 230 pounds could have received a preferred rate a year ago. Now, at many insurers, he must lose 20 pounds to get that same low rate.

  • Cholesterol: Applicants now need lower cholesterol (max 210 in most cases) and a lower ratio of good-to-bad cholesterol.

  • Blood Pressure: Like cholesterol levels, you also need lower blood pressure now to qualify for the lowest life insurance rates. Even if you're just a point over the limit and your doctor says you're healthy as can be, you won't receive the premium rate.

    All of this means one simple thing for consumers: Now is the time to buy. If you're underinsured, or you've simply been putting off the purchase, take advantage of low rates while you can. Just as homeowners rushed to refinance in recent months when mortgage rates hit rock bottom, consumers should be locking in low prices on term insurance right now.

    If you are in the middle of a current policy - say, four years into a 20-year term policy - should you replace your old policy with a new one now? This is risky business. Yes, you should shop around and see what kind of rates you may be eligible to receive. However, in order to get a new policy, you will need to submit to a new round of medical tests. Plus, you are now four years older. All of this will probably mean higher rates in the end. In most cases, it probably will not be worthwhile to replace your current policy.

    You may not realize just how much age effects policy prices. For example, for a male age 38, the cost of a $500,000 25-year level term policy is about $590 per year. But procrastinate just three years, and the cost becomes $755 per year, or an increase of about 28 percent.

    Many people delay buying life insurance, figuring that the money they save by not buying now will offset a higher premium later. Unfortunately, this thinking doesn't add up.

    That said, you should use this opportunity to consider buying an additional insurance policy. A new study (by Swiss Re, an insurance industry reinsurer) shows Americans are seriously under-insured. In other words, in many cases, if the family breadwinner dies, the family left behind will not be able to maintain its current standard of living, pay off debt or afford college.

    This brings us to the old question: how do you know how much insurance you need? The standard rule of thumb says your insurance policy should be five times your annual income. Instead, you need to think specifically about what needs your family will not be able to meet without your income. For instance:

  • How much will it cost to pay off your mortgage?
  • How will your children's education be funded?
  • If you are a stay-at-home mom, how much will child care cost?

    Everyone's situation is different, and everyone will need different amounts of life insurance. If you have other income that continues (such as from a pension, or rental or insurance from your employer), subtract that from the amount needed. Also, subtract the amount of your current investments.

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