Anthony Steuer, author of Questions and Answers on Life Insurance, shares expert advice about choosing the right term life insurance policy. He shares tips for comparing different policies, deciding how much coverage you need, choosing a beneficiary, reducing your premium, and more.

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Do you need more advice about buying term life insurance?
Read his book, Questions and Answers on Life Insurance.

How do you know that term life insurance is right for you, versus maybe some other kind of life insurance policy?

The thing I would look at is how long your need is for. Most people have a finite period of time where they would need life insurance, and in that case, if your need is for 15 years, let’s say, until your child finishes college, then you would need term life insurance. You get into a longer type of life insurance, whole life, universal life, any type of cash value, when you have a permanent need. One example might be somebody who has a special needs child, where that child will be financially dependent upon you for the rest of their lives. Another example are sometimes people use it for estate planning purposes, to leave money to children, grandchildren, a business, a charity, something like that, where that need is not going to go away.

What are some of the different choices you’ll have when customizing a term life policy? What are the different options and how will they affect your premium?

You can get anywhere from a one year term policy to a five year, flat premium, ten year level, fifteen, twenty, twenty five or thirty year, depending upon your age.

How much life insurance coverage do you need, and is there any kind of special term life insurance formula that you can use to calculate this?

The simple rule of thumb: ten to fifteen times annual income. The way that I like to approach it, you can do a very detailed analysis where you take a look at all your costs and income and expenses and come up with a number that way, and there are any number of software tools. There are quite a few different methods that I take a look at in my book, but the one I like best is figuring out how much income you think your survivor will need, and then working backwards from that to find the amount of coverage that would yield that income. For example, just to use a nice round number, if you purchased a one million dollar life insurance policy, and your beneficiary receives that, and were to invest it at a reasonable rate of return – unfortunately, right now they might get three or four percent if they’re lucky, which would yield $30,000 or $40,000 a year in income, so I would take a look at it from that approach: what do your survivors need and how can you get that for them? Then you can factor in all the different individual things that you have going on.


I heard that it’s a smart move to buy cheaper life insurance and then take the difference and invest it. What’s your advice about that?

Well, that’s a good strategy. It depends again if you have a permanent need. You’re not ever going to be able to replace that as cost-effectively as with life insurance unless you’re very, very good at investing and you have a long time frame. So if you have a need that’s going to go on for more than twenty years, at that point, you do want to take a look at permanent life insurance, rather than buying term and investing the difference. However, the reason most people have a need for term life insurance usually more than permanent is because they can take those other assets aside and invest them and hopefully have enough money to negate the need for life insurance. I use the word “hopefully,” because that means one, they would have to save the money, two, they actually have to be successful with their investing. With a life insurance policy, one of the arguments for permanent life insurance that does hold water is that it is forced savings — you are saving the money whether you like it or not, and that can be an important issue. However, the cost difference can be quite a bit.

Let’s look at a typical buyer. Say you’re a 35-year-old male looking for maybe a million dollars of coverage, maybe a 20-year level term life insurance policy. I guess, probably pretty standard. In general, what premium range can you expect to pay based on differences in your underwriting class?

Well, right now, I’m taking a look at a spreadsheet, and that person, in their best available rate class, a male, age 35, best available health which most people aren’t going to qualify at, would be able to purchase a policy for about $500 a year. However, less than 10% of the general population can qualify for a life insurance policy’s best rate class. So if we stepped up one rate class, which is more likely for most people in relatively good health, we’d be looking at closer to $700 a year, and if we take another step up from that, they would be looking at about $1,000 a year. So depending on your health, you’re looking at anywhere from $500-$1,000 with the most likely range being between $700 to $1,000 a year.

Tony, how do you choose a life insurance policy and a company to deal with?

The first thing you want to look for is a reference book like “Questions and Answers on Life Insurance,” which of course, I’m partial to as the author, or you can find a quality advisor. Look for somebody who holds the CLU designation — it’s the only designation that’s given out for life insurance education. You’re finding somebody who hopefully knows something about what they’re talking about. There are lots of people who sell life insurance, however, there’s not that many people who know about life insurance. So they can help you select a policy. If you’re doing it yourself, you want to make sure before you apply that you take a look at the company and there’s four major rating services that rate the companies. There’s A.M. Best, Standard and Poor’s, Moody’s, and Fitch Rating Services and they all give a financial strength rating to a company. That’s a good place to look. The second thing to consider is which company is most likely to offer you that rate class? Different companies have different measurements for their best available rates, where sometimes a difference of 5 pounds can double your premium with a certain company, where the next company down the line isn’t going to care a wit about that one issue. When you get an online term quote from the bigger quoting agencies, they’ll ask you a series of health questions, and the reason they do that is to select the company that will offer the best available rate based on how you answer those basic questions.

I’m sure the vast majority of life insurance agents are honest and hardworking, but I’m sure there are always bad apples out there. What shady sale tactics and other scams should you watch out for?

There’s always a simple rule, if anything looks too good to be true, it usually is. You want to make sure that the person is qualified as the starting point. Shady sale tactics might be to rush you into anything, you better do this today or its going to go away. You want to check with the department of insurance, make sure that the person doesn’t have a negative mark on their insurance department record. Avoid somebody who has a criminal history of fraud. Do a little bit of due diligence on the person. Just because your friend recommends somebody doesn’t mean that that person knows what they’re doing, so do your own homework and make a determination as best as you can if that person is a professional and checks out with your state department of insurance.

Talk about the actual process of buying a term life policy. Once you submit an application, kind of walk us through the underwriting process all the way through approval.

The first thing that you do is you fill out an application which is a lot of paperwork, generally. Then what will happen is it will go to the insurance company where an underwriter or the agent will set up a medical exam. Sometimes for smaller amounts of coverage at younger ages, people won’t need a medical exam, but generally they’ll schedule an exam where an examiner will come to an applicant’s home or office and do lab tests. They’ll draw some blood, they’ll take a urine specimen, check height, weight, blood pressure. They also check identification and sometimes they’ll do an EKG, they have portable EKG machines. They’ll also do a detailed health questionnaire. The underwriter will take a look at that, they’ll order records from your regular physician, any specialists you may have seen. There’s a Medical Information Bureau which is kind of like a credit bureau, that’s a clearinghouse for all the insurance companies. They’ll check to see if there’s any hits in there, so they don’t make their decision based on anything they get from MIB, that’s just information they take into consideration. It will show if you had an application declined at another company, which will make the underwriter look further. If your application shows that you’ve never had any type of health occurrence or anything like that, and you’ve been declined by three other companies, they’re going to know they’re missing something. In the Medical Information Bureau, it’s not going to say you were declined for a history of cancer, but it will say that you had a declined application, so it’s a general, more top level database and people can read about it at MIB.com. They will also run a DMV report, they will check your driving record, for example, they don’t want to write somebody who has had eight DUIs – that’s generally considered a bad risk for an insurance company, so they’ll do basically anything and everything that you can think of. They will also do what’s called a phone interview, where either an underwriter from the company will call or they’ll have a third party service on behalf of the company call, and they may ask you the same questions again. They want to make sure that everything you say is consistent with how you said it before, and sometimes it’s just to get additional information. I’ve had clients who’ve had a skin cancer, and it’s unclear on when that occurred, how bad it was, and how it was treated. So they’ll want more information about it. They’ll ask to make sure they have the correct doctors, the correct dates. Sometimes medical records will be incomplete – a doctor will have retired and sent half of your medical file to the new doctor and half will have vanished, so sometimes you’re just trying to piece together to make sure they totally understood. The underwriter’s job is twofold. One, they obviously want to approve policies because companies aren’t going to be making money if they don’t insure anybody, but at the same time, their job is to screen out somebody that’s not going to be profitable for the insurance company. The insurance companies don’t care about you so much as a person as about whether or not you’re profitable for them. And that’s what the underwriter is going to determine—at what level you’ll be profitable to the company or not.

What if you have a relatively minor health issue like high blood pressure or maybe you’re slightly overweight? Is there a way to find companies that maybe have more lenient underwriting standards or are they about the same?

That’s what I was talking about earlier, making sure that you’re working with a professional or knowing that you’re going through a quoting service that takes into account the different factors. That will be a question that they ask, for example, on the high cholesterol. If you have high cholesterol that is controlled by medication which will give you a lower cholesterol reading and the readings have been stable for six months or a year, that won’t matter so much in underwriting with most companies. There are a few companies that will still grade you up in terms of charging you more premium for that, while other companies will say, “you know what, that’s fine, you’ve been taking medication for a year, the levels are good with the medication, we don’t see a problem with that.” The companies do have different height and weight tables, so that’s also one of the screening questions—knowing which companies will be more generous on that issue can make a significant difference in how much premium you pay.

Is there anyone who should consider a no medical exam life insurance policy, or are you always better off from a monthly premium perspective, with an underwritten policy?

If you can obtain an underwritten policy, you are going to be better off with that. Generally, the no medical exam policies is they’re taking anybody and everybody, so they have to take into account that there’s going to be some poorer risks in that, so they’re going to have to charge a higher premium. The people who would want to take advantage of the no medical exam, one, you have the lazy people who don’t want to bother with anything else and they just don’t care so they’ll go ahead with it, and then you have people who do have health issues and aren’t able to get a life insurance policy at a good rate. So they do serve a purpose, however, you’re usually better off trying to get a policy on your own and at least making the determination as to whether you can get a policy at a competitive rate.

Tony, what’s your opinion about purchasing life insurance online versus from a local agent?

Again, it depends on how much you want to rely on yourself. If you have some knowledge and feel comfortable doing it yourself, then there’s no problem with doing it online. A lot of the larger online term services do have trained professionals to walk you through it. They may or may not have CLUs. Anytime you get a qualified advisor, you’re probably going to get somebody who’s going to lead to a better result for you; however, that’s not always necessarily true. Do your own reading and research and then either go online or go to a third party agent. Having that knowledge will always help you.

Are there good online resources that you can recommend that people can take a look at when they’re trying to navigate the whole life insurance process?

Yes, of course there’s my website. There’s Insure.com and there’s also www.iii.org. There’s also one that’s an industry website, it’s lifehappens.org, it’s the Life and Health Insurance Foundation for Education, and they have some very good information on there.

Talk about choosing a beneficiary for your policy.

Well, there are a couple considerations. It will depend on some degree if you’re in a community property state or a separate property state. I’m mostly familiar with the community property laws, so if you live in a community property state, basically your spouse is going to get everything anyway. Unless you have some estate planning reason to avoid it, where you have a larger estate and it may cause a gift or estate tax issue, naming your spouse is usually the thing to do. Now, naming your children as contingent beneficiaries raises the issue of whether or not you should establish a financial trust for them. That gets into the issue of guardianship, and what happens to your children after you pass away. Some laws in some states will dictate that whoever gets physical guardianship of your children will also get financial guardianship, and if you give them money outright to your children as contingent beneficiaries, whoever has that financial guardianship can use that money basically however they want. Just because somebody might make a good physical guardian providing a good house for them and everything else, they may not be the best person suited to handle the money. So you could set up a trust for the benefit of your children where funds from the life insurance policy can only be used for clothing, housing, education, where the trustee is restricted in taking out the money from the trust, and then the money goes to the children at an age where you deem them responsible. Your brother may be great with kids and provide the perfect household, however, may not be the world’s best money manager, or, you know when somebody is left with a million dollars from a life insurance policy it can be awfully tempting to break into that money no matter how good of a person they are, so you remove that temptation for them and make sure the money is kept for your children.

What factors, other than medical issues, will affect the premium you pay? Can your credit rating or your occupation or maybe even your hobbies work against you?

Your hobbies can work against you. If you skydive every week, companies may not like that very much. Your driving record will be taken into consideration, definitely your avocation will be taken into consideration. If you’re a test fighter pilot for the Navy, that can lead to a problem. But again, that’s where working with somebody who can shop the companies for you will make a difference because certain companies won’t be as concerned by a certain activity or occupation as another company. However, private pilots will always have an issue of getting life insurance, while commercial pilots won’t as much because they have a continuous amount of flight time and more experience. Pilots are a good example for that.

What are your biggest tips for saving the most money on term life insurance?

Doing your homework. Taking into account all the things we’ve discussed and making sure that you are working either by yourself with a term quoting service that covers a good number of companies, or working with an advisor who represents more than one company and is really working on your behalf and can shop the market for you. One quick and easy way to save money, even on an existing life insurance policy, is to take a look at how often you’re paying the premium. If you’re paying it annual, semi-annual, quarterly, or monthly bank draft. If you’re paying any mode other than annual, the company is charging you a service charge, which can range up to an extra ten percent a year of premium, depending on the company and depending on how you’re paying it. Right now, on an existing term life insurance policy, you might be able to save ten percent if you’re able to pay an annual premium.

What’s the biggest mistake you see people make when buying life insurance?

A fool and their money are always soon parted, and that happens in the life insurance business. Don’t buy what you don’t need. Don’t buy what you don’t understand. One of the things that should be avoided is thinking that a life insurance policy is anything else but a life insurance policy. It is not an investment program, if you don’t need the life insurance and you buy a policy strictly because it accumulates cash on a tax-deferred basis, you’re going to lose out in the long run because you still have to pay for the cost of insurance, so buy it because you need life insurance along with the other things that a life insurance policy can do, not just because you’re getting other advantages such as a tax advantage. The other thing about relying on it for tax purposes is you’re hoping the tax laws aren’t going to change or remain the same and that’s a big gamble. Understand what you need and then buy appropriately.

Anthony Steuer is the author of Questions and Answers on Life Insurance. He holds the Chartered Life Underwriter (CLU®) designation and is one of only thirty licensed individual life and disability insurance analysts in California.