Life insurance is one of those products hyped by marketers who tout low prices. Of course, cost is a huge factor in any financial decision. But are you really getting the lowest cost and the best deal for your life insurance needs?

Life insurance is one of those products hyped by marketers who tout low prices. Of course, cost is a huge factor in any financial decision. But are you really getting the lowest cost and the best deal for your life insurance needs?


Comparing the cost of anything needs to be done on an apples-to-apples basis. For life insurance, that means the comparison is only valid when you look at two contracts with the identical provisions and benefits. 


Starting with term insurance, there are several points of differentiation. First may be the company ratings. One may expect to pay a little more for a company with higher ratings. If you are OK with lower ratings to save a few bucks, go for it.


For annual renewable term products, you want to see how long the policy will be in force and how high the premium gets in the later years. Few policies last for life - and if they did, you probably would not be willing to pay the premium when you are age 90. Other points of comparison for annual renewable term contracts would be their convertibility into permanent products at a later date. Some allow it and others do not.   Some restrict what you can convert to, and others allow conversion to any of the policies offered by the company at the time. And lastly, some companies have very good permanent products that you'd be proud to own, and others are not quite as good.


For term contracts, such as 10-, 20- or 30-year products, the same points of comparison exist - along with a few new ones. You want to evaluate what happens to the contract at the end of the guaranteed premium period. Some will simply end the contract with no more coverage, while others may offer extensions. The premiums, however, on those extensions are frequently extremely high, effectively forcing you to surrender the policy unless you knew that you were on death's doorstep.


Permanent products such as whole life or universal life have a completely different way to compare costs in addition to the provision-by-provision comparisons. These products may be recommended for estate planning or for a client who wants to build up cash inside the contract for safety or future use.


I like to look at the internal rate of return on the internal cash surrender value and the internal rate of return on death benefits. Most permanent insurance illustrations will actually show you, year-by-year, the forecasted rates of return on your premium dollars.


John P. Napolitano is the CEO of U.S. Wealth Management in Braintree, Mass. He may be reached at jnap@uswealthcompanies.com.