Buying Life Insurance: Do you Really Need Multiple Quotes?

When buying life insurance, consumers will find an entire industry built around the idea that getting multiple quotes is the best way to get a good deal. A quick survey of rate comparison websites reveal claims that "premiums can vary by as much as 50%," (lifeinsuranceindepth.com) and "buying insurance online can save you up to 75% on your premiums" (Efinancial.com). The presumption is that a consumer who shops around will find a significant range of prices and be able to choose a policy whose price is near the bottom of the range, or at least avoid inadvertently selecting an overpriced policy. But our research didn't turn up a single study that had actually attempted to test this theory. Is it true? Or is it simply a marketing technique designed to sell the service these sites provide?

Life insurance is a commodity product -- there is not much difference between one policy and the next. It's not like you can buy the nicer policy made of silk and leave the cheaper nylon one on the rack. If you are healthy and want to be insured for $500,000, it would seem reasonable that comparable policies from any of the hundreds of companies willing to insure healthy people, should be priced similarly. Who's right? The websites that claim large savings, or the theory of a commodity product with similar prices? We decided to do some comparison shopping on our own and see what we could find out.

Shopping for Insurance

Our researcher obtained quotes from ten different life insurance companies using a variety of methods. She looked at online quotes for specific insurance companies, and sites offering multiple quotes at once. She also spoke with independent brokers, and brokers who are affiliated with specific insurance companies.

Our shopper sought quotes for a 32-year-old female and a 45-year-old male (her partner). Neither person used tobacco, they had good cholesterol levels and blood pressure, and both had solid family health histories. Our researcher, like forty-five percent of insurance buyers in 2007 (American Council of Life Insurers), wanted a term policy, meaning the coverage would be valid only during a specified number of years. Policy length can vary from ten to thirty years, and we decided to request a twenty-year policy with $500,000 of coverage.

As much as possible, we tried to get quotes from different companies for the exact same policy--no special riders, no bells or whistles. However, it is possible that some policies had hidden features which we could not discover and which made them more costly. As far as we could tell, however, the policies were indistinguishable from one another.

Our shopper started by filling out short, online forms that asked for only a small amount of personal information. Generally, she needed to supply only a few basic physical characteristics such as height and weight; she was also asked to rate her own health based on a brief description of the specific health conditions allowed for each rating category.

The website that promised quotes from multiple insurance companies, followed up with an on-screen message saying a broker would call soon. In fact, six brokers called in the next two days. One company had three different representatives call, and emailed several times, even after our shopper had a thirty-minute phone conversation with one of their agents.

All of these agents were independent brokers who sold policies from many different insurance companies. They asked much more detailed questions than what was on the online form, including information about family medical history, ("Are your parents still alive? What about your siblings?"), personal medical history. ("Have you ever used tobacco products?"), and even hobbies ("Do you like adventure sports like rock climbing or hang gliding?").

Some of the agents performed the intake interview over the phone, provided a handful of quotes from different companies, and then backed off quickly when told the customer wanted to think about it. Some agents were much more eager to clinch the sale; one said he was "the best agent out there," although his quotes were almost exactly the same as everybody else's. Another agent was so pushy, the shopper finally agreed to let him draw up the application paperwork and mail it, just to get off the phone. All the policies required a physical exam before an exact premium could be agreed upon. These exams are usually performed in the applicant's home and paid for by the insurance companies.

In addition to talking with independent brokers, our shopper went directly to the insurance companies themselves and used the contact forms on their websites to find company agents in her geographic area. Suprisingly, these agents did not have exclusivity contracts with the insurance companies they worked for; they had access to quotes from other companies and were allowed to sell the best price, even if it didn't come from their company.

Most importantly, the company-affiliated agents wanted to sell more than just insurance. One agent wanted to visit the applicant's home to discuss financial services he offered and another wanted information about the shopper's investment and savings accounts so he could manage them. They also wanted to help the customer decide what kind of policy to buy (term, whole life, or something else entirely) and how much coverage was necessary. In doing so, they needed many more details about finances, including annual household income, information about assets, a mortgage balance, and more. When these agents were told that the shopper had already done the research and knew how what she wanted to buy, none of them was able to accept this quickly. The independent brokers also offered to help figure out what kinds of policies were needed, but they quickly agreed to give quotes based on what the shopper had already determined.

A Range of Quotes

For both the male and female shopper, eight out of ten quotes were within 20% of the lowest one, and two were much higher. The highest-priced policy for the woman was 2.5 times ($270 per year vs $684 per year) the lowest-priced. For the man, there was a smaller range, but the highest-priced policy was still nearly 1.5 times ($630 per year vs $916) higher than the lowest.

The highest quotes came from large financial companies who don't specialize in life insurance. But from the independent brokers, the same numbers came back again and again. The independent brokers were also the easiest to work with. They didn't ask as many invasive questions as the company-affiliated brokers, and for the most part they didn't use hard-sell techniques. They also seemed to know the business very well. One helpful broker pointed out that different companies have different weight cut-offs for the lowest premiums. So, for example, if our shopper could lose a manageable three pounds, she would fall into a better health category and save a few dollars on the annual premium.

Conclusion: Comparison Shopping Works

Our research suggests that, indeed, life insurance premiums for the same policy can vary widely between different insurers: shopping around does make a difference. However, you may not need as many quotes as you might think. If you decide ahead of time to only get a single quote from a financial services company that you already have financial dealings with, you could easily end up with a quote at the high end of the range. However, if you get at least, say four quotes -- being sure to include quotes from independent brokers -- you will get a good sense of where the majority of premiums fall. In addition, shopping around has some other advantages.

Our shopper said that because she got so many quotes, she felt confident that she was getting a competitive price. She also learned that each company has a slightly different weight threshold for their preferred health categories. One agent revealed the cut-off weights for the best health designation for several different insurers. With that information, an applicant can understand why the rates are slightly different and also hone the rate to the best one even within the narrow twenty percent range of difference.

Speaking with different agents also provided helpful information about life insurance and estate planning, and about family medical histories. For example, one agent pointed out that if an applicant had siblings with health problems, she could restrict her search to companies that only request information about the health of applicants' parents -- not their brothers and sisters.

Most importantly, knowing that prices are going to be similar doesn't mean there aren't other factors you can shop for. Talk to an agent about service, about how easy it is to talk to a real live person on the phone, about payment plans and about getting bills by email rather than on paper.

So is the "comparison shopping" mantra for life insurance just marketing hype? It doesn't look that way from our research.