Life insurance on a shoestring budget

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If you’re putting off buying life insurance because you think it’ll cost too much, it’s time for a reality check.

“Most Americans overestimate the cost of life insurance by almost three times,” says Catherine Theroux, a spokesperson for LIMRA, a global research and consulting organization that tracks the life insurance industry.

Young adults, who are most likely to qualify for the best insurance rates, overestimate the cost by almost seven times, according to recent research by LIMRA and the nonprofit LIFE Foundation.

Basic life insurance is surprisingly affordable, even if you’re supporting a family on a shoestring budget. Insure.com’s life insurance basics provides an overview of life insurance alternatives.

Here are six tips for finding the most affordable coverage possible.

1. Buy as much term life as you can afford now

The average cost of basic term life has dropped by about 50 percent in the last decade, says Marvin Feldman, LIFE Foundation president and CEO. The decrease is due to longer life expectancy and greater cost efficiency in product design and administration, he says.

The typical cost of a 20-year, $250,000 level-term life policy for a healthy 30-year-old is $150 a year, about the cost of one Starbucks latte per week. Consumers surveyed for the study by the foundation and LIMRA inaccurately estimated the cost of a typical term life policy at $400 a year.

Term life insurance covers you for a certain period — such as 10, 20 or 30 years — and pays a death benefit if you die while the policy is in force. The younger and healthier you are when you buy, the lower your quotes will be. Life insurance rates go up as you age and as you develop health conditions, such as high blood pressure.

2. Consider annual renewable term life

Annual renewable term life guarantees your insurability for a set period of time. However the premium increases each year during the term, based on your age. With level-premium term life, the premium stays the same for the entire term.

In the early years of the policy, premiums for annual renewable term life are less expensive than those for a comparable level-term life policy. David Schulman, a MassMutual general agent at DBS Financial Group in Fort Lauderdale, Fla., recommends annual renewable term for people on tight budgets whose incomes will increase over the years.

3. Comparison shop

Life insurance rates vary by company. Get term life quotes from different carriers to find the best deal. Generally, the more you buy the less the cost is per $1,000 of coverage.

4. Don’t go by price alone

Check the financial ratings for the life insurance company selling the product before you buy, and shop for quality, Schulman says. Insure.com’s Insurance Company Ratings Lookup Tool provides free Standard & Poor’s financial strength ratings.

Schulman recommends steering clear of ultra-cheap term life products that lack important options, such as waiver of premium riders, which pay the premium if you become disabled and can’t work.

Another important feature that might not be available on the cheapest products is the ability to convert the term policy to permanent life insurance, such as whole life or universal life.

Permanent life insurance, which normally is more expensive than term life, covers you for your entire life and includes cash value, which grows tax-deferred. The ability to convert is important for two reasons. One, the conversion feature lets you turn the term life policy into permanent coverage, even if you develop a health condition and would otherwise be uninsurable. Two, conversion lets you build a permanent investment as your income grows.

Shulman says you should work with an agent to help sort through the options. Although term life is simpler than whole life or universal life insurance, the products vary and there are nuances to consider when choosing a policy.

5. Low income? Apply for free life insurance

MassMutual’s LifeBridge Program provides free, 10-year, $50,000 term life coverage for parents who qualify. The company pays the premium and issues the policy to a trust. If you die within the term, the trust will pay up to $50,000 to cover your children’s education. Your kids have 10 years after your death or until age 35 to use the money.

To be eligible, you must be between ages 19 and 42 and a parent or legal guardian of a dependent child under 18. You must be employed with a family income between $10,000 and $40,000, and you must be in good health.

Since the program was launched 10 years ago, it has issued 12,300 policies and paid 22 claims, MassMutual spokesperson Laura DeMars says.

6. Maximize group life insurance

Many employers offer basic group life insurance as a benefit. Usually, the amount of coverage isn’t enough for most families. Check on how much is provided and whether you can supplement it with additional group life coverage at your own expense. Premiums for voluntary coverage through a group plan can be 10 percent to 20 percent less than individual life insurance because of enrollment and billing efficiencies, according to the LIFE Foundation.

Think about your family

If you’re tempted to delay purchasing life insurance because money is tight, just think how financially stressed your family would be without you and your income.

Research by the LIFE Foundation shows a big reason people don’t buy life insurance is they have other financial priorities, such as paying the mortgage or saving for their children’s education.

“But those priorities are exactly the reason to buy it,” Feldman says.