From the March 2010 issue of Entrepreneur

Type the words "affordable life insurance" into Google, and 12.3 million entries pop up. No exam required. Rates starting as low as $1.

Sounds like a no-brainer, right?

Trouble is, if you've never shopped for life insurance before, you may end up buying less coverage than you need or paying big premiums for coverage that's two sizes too big.

"Buying life insurance isn't like going online and buying office supplies," says Mindi Wernick, a financial representative with the Northwestern Mutual Financial Network in New York. "Cheaper isn't always better."

That's because, despite the teaser rates and the come-ons, life insurance isn't one-size-fits-all. It's coverage that's tailored to your age, health, income, assets and personal financial needs. That's why $1 million worth of coverage for a business owner who's 35 and healthy can cost less than $100 a month while the same coverage for a smoker in his 50s with high cholesterol, heart disease and diabetes can cost 10 times that much--if he can find an insurance company willing to cover him at all.

Premiums can also vary depending on the company that writes the policy. Some insurers offer low, low rates to get prospects in the door but can't process the volume of applications that pour in. Says Wernick, "You want to go with an A-rated company that can service your account."

Here are five ways to find a policy that makes sense for you and your bank account:

  1. Quit smoking, lose weight and go to the gym.
    Insurance companies make money by investing policyholders' premiums in the stock market, not by paying out claims. That's why they charge more to cover people with health problems--because a 300-pound smoker with a history of heart disease is a much bigger risk than a nonsmoker who eats right and exercises on a regular basis. The easiest way to save money on life insurance is to quit smoking and go on a diet.
  2. Figure out how much insurance you really need.
    For most people looking to buy life insurance, three factors determine how much coverage they need:

    A. The size of their mortgage (so that their family doesn't have to sell the house and move).

    B. Their monthly living expenses (so that their spouse can continue to pay the bills).

    C. The amount of tuition they expect to pay to send their kids to college. This usually translates into roughly 10 times their annual income, Wernick says, meaning that an entrepreneur who nets $100,000 a year would need $1 million worth of coverage.
  3. Decide what kind of policy is right for you.
    Some people prefer to rent their life insurance policies; others prefer to own them. Term life insurance works like a homeowner's policy. You pay a fixed premium for a certain number of years (say, 20 or 30), and if you die during that time, the insurance company pays the claim. With a "whole life" policy, you pay a higher annual premium but you accumulate cash that you can borrow against or withdraw from your policy when and if you need it. "You'd have to earn 9 percent to 10 percent in the stock market every year and invest the difference [between a term policy premium and a whole life policy premium] in order to match what you'd get from a whole life policy," Wernick says. "But most people don't invest the difference, they spend the difference."
  4. Pick a rock-solid underwriter.
    Life insurance companies are regulated by the states in which they do business, but don't assume that all life insurance companies have the same ability to pay their claims. Be sure to check the underwriter's financial strength rating before you sign on the dotted line. A.M. Best, for example, offers an independent quantitative and qualitative evaluation of insurance companies' balance sheet strength, operating performance and business profile.
  5. Find a knowledgeable financial planner to help you.
    Unless you know exactly what kind of policy you need and how to get it, you ought to consider talking to a financial planner or knowledgeable life insurance agent who can help steer you in the right direction. Because life insurance agents typically are paid by the underwriter, there's no charge to sit down with them and pick their brains even if you ultimately decide to buy your policy online.

    Whichever direction you go, the sooner you start looking for life insurance, the better. Locking in a policy now when you're still young and healthy can save you big money when you're older.

Rosalind Resnick, founder and CEO of Axxess Business Consulting, a New York consulting firm that advises startups and small businesses, is the author of Getting Rich Without Going Broke: How to Use Luck, Logic and Leverage to Build Your Own Successful Business. She can be reached by e-mail at rosalind@abcbizhelp.com or through her website at http://www.abcbizhelp.com