Short Take

Cheap life insurance? Time's running out

Policy costs will likely rise nationwide, within weeks.Here's what you need to know to get a good deal before the deadline.

By Brad Burg, Senior Editor

If you have no term life insurance or you'd like more, for that sleep-tightfeeling, prepare to take action. You've got only a few weeks to lock inwhat may be the lowest prices you'll ever see.

Rates are lower than they've been in years, but they'll probably rise--maybea great deal--after Dec. 31. That's when new insurance laws will start requiringcompanies to maintain higher reserves, which will drive up costs nationwidefor guaranteed-rate term policies. "Right now, a 20-year, $1 millionpolicy might cost a 40-year-old man $1,000 a year," says Byron Udell,president of AccuQuote, a quotation and sales service. "That's a 60percent drop from five years ago. But the premium might well double nextyear." True, Udell earns his living by selling insurance. Still, wegot the same reaction from a wide variety of experts in the field. "Thisis not the time to hesitate," says New York City insurance consultantGlenn S. Daily.

Here are the answers to questions you may have. Review them, and if youdecide to act, get some quotes fast. Time's a-wasting.

Aren't the new rules taking effect in only half the states next year?Probably, but 12 more states are considering them, according to Van ElsenConsulting of Colfax, IA. Besides, residents of nearly every state willlikely be affected immediately. Udell explains: "If a company doesbusiness in a state with the new law, its policies there must comply withthe statute. Rather than have two sets of policies, the insurer will raiserates everywhere."

In the past, some companies would have set up affiliates just to complywith one state's regulations. But considering how widespread the new ruleswill be, the consensus is that insurers no longer will bother with suchcomplications.

How much coverage should I get? An agent can help you figure thisout. But you can also get online calculations at Internet sites such aswww.accuquote.com and www.insweb.com.The sites offer comparative rates, too, as do others, including www.quotesmith.com and www.term4sale.com.

To protect your family, you may want to err on the side of too much coverage,especially since we've found at least two ways you can modify the deal lateron. First, some companies may let you lower a policy's face value at a futuredate, though they may be coy about this option. Second, you could followa strategy that Daily suggests: Buy the amount you want, using several policies.Then you can cancel one later--for example, when your kids finish college.

Or you might later decide to keep what you've got. "Inflation usuallydoes all the coverage reduction you'd want," says Udell. "Yearsago, my father sold many $25,000 policies, and $50,000 seemed like a lot--fora while. So an extra million, or even more, may not look so huge in fiveyears."

Won't you pay a lot more if you buy coverage with several policiesinstead of just one? Not necessarily. Let's check on our 40-year-oldman again. Suppose he can afford $2 million in insurance now, but he can'tbe sure his budget will always allow for that. "A $2 million policymight run him $2,075 a year," says Udell. "He might pay $1,075for a $1 million policy--or $2,150 for two." So keeping his optionsopen will raise his premium only about $75 annually.

Each policy will involve a separate fee, notes Lee J. Slavutin, MD, alife insurance agent and consultant in New York. But those costs probablywon't be deal-breakers either, he notes: "They're typically $50 to$70."

Here's one big caution, though: Insurance companies may dislike thispractice--a crucial complication in this last-minute time frame. Mary Pollman,a vice president at CNA, says, "We certainly wouldn't encourage it,since it increases some of our costs. And the unusual arrangement mightslow up the underwriting process." So find out about this early--andin writing.

Using several policies seems like a hassle. Why not just get one policythat allows you to lower the coverage? That may be an option. CNA, forinstance, has a policy that offers such flexibility. But some companieswon't allow it. Others will, yet the policy may not state that. In suchcases, you're wise to take the initiative and get it documented. "Youshould request a letter confirming that the company will reduce the faceamount," says Slavutin. Assuming the option does exist, you may bepermitted to exercise it only once. If you use the multiple-policy strategy,of course, you can drop one any time you choose to.

Any other factors to consider concerning multiple policies? Ifa trust will own your insurance, now or in the future, that adds a layerof complexity, with crucial annual paperwork. So in this case, one policymight be the best choice.

Even if a trust isn't involved, you might want to buy from only one company,for simplicity's sake--especially since time is short. On the other hand,if you're buying a lot of coverage, you may prefer to spread the financialrisk among several companies. "Some of my physician clients have $20million in coverage," says Daily. "When that kind of money isinvolved, I generally advise buying from at least four companies."

What if I'm considering whole life? Should I ignore that, now thatterm is so inexpensive? In most cases, term insurance is all you'llever need. But this is another decision you needn't make now. " Justget convertible term," says Daily. "Then you can switch wheneveryou want, with no physical exam."

Postponing the decision is wiser than rushing into whole life, Dailynotes. "Often, when you bail out of whole life, you get hit with steeppenalties," he says. "Also, tax laws change, companies change.And even doctors lose jobs nowadays. So you might want to consider verycarefully before committing to whole life." In any case, don't letthe term-vs-whole-life debate slow you down at this point.

It takes a while to buy insurance. You must submit an application, havea medical exam, have your medical records reviewed--and the end of the yearis looming.

True, even among states that are instituting the new rules, it's notyet certain that Jan. 1 will be the effective date in every case. But ifyou haven't at least submitted an application by year-end, you risk gettingstuck with the new rates. So the further along in the purchasing processyou are by Dec. 31, the better.

Also, keep in mind that you're not the only person thinking about thisright now; some insurers may be swamped with applications. Here, physiciansmight have a slight edge, suggests New York insurance broker Rick Lehrer."The biggest delay in the whole process is in getting the medical recordsto your insurer for review. As a doctor, maybe you can get your own physician--orthe doctor's staff--to move faster on this."

Could you backdate, if you miss the rate-change deadline?

Because higher reserves will soon be required of insurance companies,term insurance rates will rise--probably on Jan. 1, and probably in moststates. So you may try to buy before the deadline. But suppose you don'tcomplete the process before the new rates take effect. Are you out of luck?

Maybe not--if you at least submit your application before the cutoffdate in your state. In that case, you may have one last chance, says professorJames Carson of Illinois State University: "Suppose you apply for insurance,and you find you'd have gotten a better rate if your policy had been inforce by your last birthday. You and the company might agree to set backthe policy's start date--typically by up to six months--so you can stillpay that rate."

Though backdating sounds like a shady practice, it's legal in many states,because it simply allows a break for consumers. Both sides benefit, andthere's no deception. Of course, as New York insurance expert Glenn Dailynotes, "you pay for a few months of insurance you don't need, sinceyou've already lived through the period. But you probably won't complain."

However, rules on backdating differ from state to state. And even wherebackdating is allowed, you may not be able to count on it in this context.As Dale Hall of The Midland Life Insurance Company points out, "Thelaws that allow backdating weren't written in contemplation of a changein insurance regulations like this."

So no one can say right now whether backdating can legally help. LarryGorski, an Illinois Department of Insurance actuary who helped develop thenew insurance reserve requirements, is only partly encouraging. "InIllinois, so long as the application is submitted before the end of theyear, I'd think you could backdate to 1999," Gorski says. "We'dbe hard-pressed to find that the policy can't use the old rates." Buthe adds, "I can't tell you what the courts will say."

Here's another strategy to look into: Since a policy may be considered"bound" when a payment is accepted, ask about sending in yourfirst premium along with the application. You might also want to ask whatother deadlines apply. Many companies are setting their own cutoffs forvarious stages of the process, to ensure compliance with the new laws, cautionsinsurance consultant James Van Elsen of Colfax, IA. And since you're startingclose to year-end, carefully document when you take each step. You may needthat proof.

. Cheap life insurance? Time's running out. Medical Economics 1999;22:49.