6 signs you’re about to overpay for life insurance

More than half of Americans overestimate the cost of life insurance, according to the 2021 Insurance Barometer Study by industry groups LIMRA and Life Happens. Among millennials, 44% think a 20-year, $250,000 term life policy for a healthy 30-year-old would cost $1,000 a year, while the actual price tag is about $160.

If you’re expecting a high price, it’s easy to end up paying too much. Here are six signs that your life insurance quote may be too high, and some tips on how to lower it.

1. You’re buying a policy for its potential cash value

If you’re shopping for life insurance based on what it can do for you while you’re still alive, instead of how it helps your loved ones after you die, you might end up overpaying. Many permanent life policies gradually build cash value that you can withdraw in certain circumstances, but these policies aren’t cheap.

“People talk about using the money to pay for children going to college (or) for retirement income,” says James Brewer of Illinois, a certified financial planner and founder of Envision Wealth Planning.

Instead, Brewer recommends you focus on how much life insurance you need to support your family if you die. Most needs can be covered with a term life policy — a cheaper alternative to permanent life insurance, and the right fit for most people.

2. Your policy has costly add-ons

Life insurance riders, which are add-ons you can use to personalize a policy, can sometimes greatly increase the cost of your premium.

One example is a return-of-premium rider. With this option, the insurance company refunds all premiums paid for a term life policy if you’re still alive when the policy expires. While it’s an eye-catching feature, a return-of-premium rider can triple your premium. “It’s a bad use of your money,” says Sam Price, an independent life insurance agent in Alabama. “They’re going to give you your premium back, but not interest that you could have had.”

An accidental death rider is another option that Price says may not be worth the money. This rider increases the death benefit if you die in an accident. But insurers have strict guidelines for which accidents they’ll cover, and if the death doesn’t qualify, the extra benefit won’t pay out.

3. A medical exam isn’t required

Insurance companies use medical exams to determine the risk of insuring you and how much you’ll pay for coverage. If you choose a policy that doesn’t require an exam, insurers may assume the worst — and you’ll probably pay more.

Some insurers allow you to skip the exam through a process called accelerated underwriting. These companies use algorithms to evaluate data about you and decide quickly whether to issue a policy. While some people may still get their best price this way, Price says, others might end up paying much more than if they had simply taken the exam.

4. The policy’s premiums aren’t level

Annual renewable term life insurance policies start with a low premium that increases every year. Over time, the policy can become expensive. “If your policy’s premium is increasing every year, there’s a great chance you’re overpaying,” writes Price in an email.

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A better option is level term life insurance, which has premiums that stay the same over the lifetime of the policy and is typically cheaper in the long run.

5. You’ve waited too long to get life insurance

Life insurance costs increase as you age, so a policy purchased in your 50s will cost more than the same policy at 30.

“Don’t procrastinate,” said Susana Zinn, a California independent life insurance agent, in an email. “Life insurance can be less expensive than you might think.”

If you know you need life insurance, it’s best to buy a policy now. That way, you’ll lock in your most affordable rate at your current age and health status.

6. You didn’t shop around

Shopping around is the best way to find the right life insurance at the lowest price. If you settle for the first policy you find, you could end up overpaying. Prices vary from one insurer to the next.

You can compare life insurance quotes from several companies online or through agents. “If you’re willing to have (a) discussion with more than one agent,” explains Price, “you’ll be a more informed consumer able to make the best decision for your money.”

— By Ben Moore

Moore is an insurance writer at NerdWallet. Read more