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Buying a Bigger Life Insurance Policy Stretches Your Dollars

Sept. 30, 2015
Insurance, Life Insurance
Buying a Bigger Life Insurance Policy Stretches Your Dollars
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If you think you can afford only a minimal amount of life insurance — or none at all — you’re not alone. Many people go without coverage because they overestimate how much it costs.

In fact, it can cost less than $60 per year to boost a $100,000 life insurance policy to $250,000, according to a NerdWallet analysis of 20-year term policies. That’s because the cost for every additional $1,000 of protection goes down as you buy larger amounts.

When you’re asking yourself, “How much life insurance do I need?” consider getting quotes for bigger policy amounts. For example, calculate premiums for both $250,000 and $300,000 policies. You might find it’s worth spending a little more to get more coverage and a better value. 

A look at prices for bigger policies

NerdWallet looked at life insurance quotes for 20-year term life insurance policies for a 35-year-old man and woman, with policy amounts ranging from $100,000 to $1 million. While the overall cost of life insurance rises with each level of coverage, your money goes further when you buy higher levels of protection. For example, a $100,000 policy would cost the man an average of $144 a year, or $1.44 for every $1,000 of coverage, while a $500,000 policy would cost $328 a year, or 66 cents per $1,000. That’s a savings of 54% on a price-per-thousand basis.

[Life insurance quotes are available through NerdWallet’s Life Insurance Comparison Tool.]

Life insurance companies offer these price breaks at different “bands” of coverage. One company might have a price break at $250,000 in coverage, another at $500,000. They may have price breaks at multiple bands, too, the higher you go.

Bigger life insurance policies cost less per $1,000
Male Female
Coverage Annual cost Price per $1,000 Annual cost Price per $1,000
$100,000 $144 $1.44 $129 $1.29
$250,000 $201 $0.81 $180 $0.72
$500,000 $328 $0.66 $286 $0.57
$1 million $600 $0.60 $496 $0.50

Methodology: Rates are for 20-year term life insurance policies on healthy, nonsmoking 35-year-olds of average height and weight. Rates were averaged from all insurers in NerdWallet’s life insurance comparison tool. Your rates will be different.

The reasons behind price breaks

Life insurance companies base premiums on an applicant’s life expectancy and desired amount of coverage, the investment return insurers can earn on premiums, and the cost to issue and maintain the policy.

A smaller policy means your insurer pays out less money in the event of your death, but it also has a lower amount of your premiums to invest and from which it can profit. And while bigger policies often have higher upfront costs for insurance companies, such as a more extensive life insurance medical exam, those expenses eat up a smaller share of the higher premiums.

Competition among insurers for customers at different coverage levels can also affect pricing bands. For example, you’re unlikely to find price breaks below $100,000.

When you buy more life insurance, you can stretch each dollar further.

NerdWallet’s life insurance tool makes it easy to figure out how much coverage you need and compare prices at a variety of coverage levels.

Aubrey Cohen is a staff writer at NerdWallet, a personal finance website. Email: [email protected]. Twitter: @aubreycohen.

Image via iStock.