Upselling is a tried-and-true sales tactic, from the carpet cleaner who offers to do your upholstery to the fast-food cashier who asks if you want fries with that.
Buying more than you planned isn’t a big deal for small stuff. But it gets expensive for life insurance.
Insurance agents make money from sales commissions. Many have your interests at heart, and buying more coverage might make sense. But some may be focused more on their own bottom line. Your goal is to buy the coverage you need without getting talked into unnecessary extras or the wrong policy altogether.
Here are five typical examples of upselling and what you need to consider before spending more.
Term life insurance is temporary — it pays out only if you die within the term. The annual cost of a 30-year term life insurance policy will be higher than a 20-year or 10-year term life policy for the same payout to a beneficiary.
What to consider: Sketch out an overall financial plan to decide on the most suitable length of a term life policy, says Chris Huntley, president of Huntley Wealth Insurance Services in San Diego. How many years will it take for your kids to be financially independent? When will you have enough in savings that your death would not harm your dependents financially?
The larger the policy’s payout, the more it will cost. But buying a policy that’s bigger than what you need means that extra money isn’t working for you in other ways, such as in your retirement fund or emergency savings.
What to consider: Think about what you want the policy to pay for. Most people buy life insurance to replace income in case they die before their kids finish college and their spouses have enough savings for retirement. How much would your family need to maintain its lifestyle if you died tomorrow?
Also keep in mind that the cost per $1,000 of life insurance drops as the total coverage amount increases, says Garrett Prom, founder of Prominent Financial Planning in Austin, Texas. So a $500,000 policy will cost less per $1,000 of coverage than a $250,000 policy. If you think you might need more coverage, get life insurance quotes for the higher amount to compare. It might not cost as much you think to strengthen the safety net.
Permanent policies, such as whole, universal or variable life insurance, cover you for your entire life. They also feature an investment component called cash value, which grows tax-deferred. You can borrow against the cash, withdraw money from the policy or give up the policy for the cash value. Permanent policies are more expensive and complex than term life policies.
What to consider: Combining life insurance and savings isn’t for everybody. If you don’t have the discipline to save money, you might be tempted to buy a permanent policy as a way to enforce savings. But if you don’t need lifelong insurance, Prom says a smarter strategy is to buy term life, address your spending habits and max out contributions to tax-advantaged plans, such as a 401(k) retirement account.
A permanent policy should serve you the rest of your life, says Scott Witt, owner of Witt Actuarial Services, a fee-only insurance advisory in New Berlin, Wisconsin. “If you think, ‘I don’t know if I’ll want this policy in 10 years,’ run, don’t walk, away from buying.”
Don’t buy anything you don’t understand, Prom says. If you’re unsure whether you need a particular policy, get a second opinion from a financial advisor who doesn’t make commissions off sales.
You may visit an insurance agent to buy a policy on your own life, only to get a recommendation to also buy coverage on your spouse or child.
What to consider: Life insurance is usually a smart idea for both parents while the kids are growing up, even if one parent doesn’t earn income. A stay-at-home parent provides valuable services that the family would have to pay to replace, such as child care.
Carrie Houchins-Witt, a fee-only financial planner in Coralville, Iowa, says it might make sense to lock in permanent coverage for a child if there’s a family history of a serious health condition. Then the child would have some life insurance if he or she developed the condition and couldn’t qualify for a new policy as an adult. But Houchins-Witt doesn’t recommend life insurance on children, such as whole life insurance, as a way to save money that the child can access later. Compare how the money you’d spend on a child’s life insurance policy would grow if you invested in other alternatives, such as a 529 college savings plan.
You pay extra for optional features called “riders,” which expand the policy’s coverage.
What to consider: Evaluate each rider carefully if your agent tries to upsell you. “I don’t like riders to muddy the basic decision,” Witt says. “Companies aren’t giving these things away.”
Ask for the price with and without the rider, Huntley says. Calculate how that cost could grow if you invested the money instead.
Before you embark on a discussion with a life insurance agent, do some research about the types of life insurance available and how much you’ll need, says Houchins-Witt.
This article was written by NerdWallet and was first published on USA Today.