LIFE INSURANCE
 
 

LIFE INSURANCE

Shouldn't life insurance be called death insurance? After all, you have to die in order to collect. At its best, life insurance can be both a safety net for your dependents and an investment. On the other hand, life insurance can be a major expense. If it is, I'll show you ways to get insurance costs under control. Moreover, if it's used as an investment, chances are it will be a pretty mediocre investment. No one with a spouse and children to support should go without life insurance. Your loved ones need this protection.

Confusion Abounds

Let's face it  the insurance industry in general thrives on obfuscation, and the life insurance industry in particular is tailor-made to confuse the consumer. Even the people who sell life insurance coverage don't always understand how their products work.

All life insurance policies can be divided into two broad categories  -  term and cash value. But there are numerous variations upon these two categories. For the first-time buyer of life insurance, the number and range of options can be daunting. Even seasoned insurance buyers may sometimes be tempted to buy the first policy the salesperson pitches simply to avoid the ordeal of hearing another spiel. Whether you are a first-time buyer or an "old hand" you must be aware of what the life insurance industry is trying to do to you  as well as for you so you can find a policy that meets your needs.

You must first determine the amount of coverage you need, then the type of policy that is appropriate, and finally, the source from which to buy it. This section will help you master all three moves in the life insurance game. Don't rely solely on someone else to figure out how much life insurance you need, or to tell you where you should buy your insurance.

Deciding How Much Life Insurance You Need

Before you start talking to insurance salespeople and reading policy booklets, you should first determine how much coverage you are going to need. The last thing you want to do is talk to an insurance broker when you have no idea how much coverage you need. The broker will try to shoehorn you into a predetermined needs category based on insurance company-designed formulas. Accuse me of being cynical if you want to, but if you bought the amount of life insurance that the fancy computer printout told you you needed, believe me, you wouldn't have to fear being underinsured. One agent prepared a life insurance needs analysis for me a few years ago. The resulting number  -  the amount of life insurance the computer said I needed  -  looked more like the federal deficit than a reasonable amount of life insurance. On the other hand, many agents are very good at providing you with a reasonable estimate of the coverage you need.

Make Your Own Estimate

You need to come up with your estimate, but even before that, you must first determine whether you need life insurance at all. If you have no dependents, you may not need it. But be careful.  You may have dependents and not realize it. Obviously, a stay-at-home spouse and children who haven't yet left the nest qualify as dependents. But you also may have other dependents.  Is it possible that your parents may at some time in the future need to rely on you for financial support? Even DINK couples (dual-income no kids) may need life insurance because they have managed to get their spending up to a level that the surviving spouse could not sustain in the event of the death of the other spouse. Finally, even though you have no dependents, you may want to use life insurance to provide a bequest to a long-term partner or favorite charity.

If you determine that you do need life insurance, the next step is to realistically estimate your minimum needs. Once you know the bare minimum of coverage you require, you will be prepared to determine which kind of insurance is right for you and then compare premiums so that you get the best value. If you have family members who are truly dependent on your income, a bare minimum life insurance coverage should be the equivalent of four or five years'  worth of your current net income (in other words, after-tax salary). If you have young children, you should have six to seven times your salary in coverage. In theory, this will give your family some breathing space to get back on its financial feet. If, as is the case in the majority of families, you and your spouse both have jobs, you may not need as much life insurance as this bare minimum, but you will probably need at least the equivalent of a couple year's net income in life insurance coverage, and probably more if there are young children.

Once you have determined your bare-minimum life insurance needs, you can make a rational assessment of the amount of life insurance that you think is appropriate. This way, you (not your insurance agent) will be responsible for the level of coverage you ultimately buy. For example, you may be confident that your family will be fine with your bare-minimum amount of coverage. Others would like to increase their coverage to assure a sound financial future for the family. For example, you may want to add insurance over the bare minimum to pay off the home mortgage, or use additional insurance to set up a college fund for the kids (or grandchildren).

It's not that difficult to estimate how much life insurance you should carry. If you would like to download the Life Insurance Needs Worksheet to determine how much life insurance is adequate for you, click on...
 
 

Changing Insurance Needs

Family insurance needs follow a cyclical pattern, so you may be best served by purchasing insurance that allows you to change the level of coverage. As your family grows, your insurance needs increase. The needs peak when the children are young, but they decline as the kids get nearer to leaving the nest.  Indeed, many people's life insurance needs decline significantly once the children are permanently out on their own (if they're ever permanently on their own). Retirees may not need any life insurance at all.

As if all this weren't confusing enough, there is one more matter to worry about. If you think that your estate will be subject to estate taxes, life insurance may be used to help pay those taxes. And if your estate is likely to incur estate taxes, your life insurance policies should probably be placed in a so-call "life insurance trust".
 
 
 

THE VARIED MENU OF LIFE INSURANCE POLICIES
 

(It's Enough to Give You Indigestion)

Once you have an idea of how much life insurance coverage you need, and before you start shopping, it is important to understand the kinds of life insurance products that are available. Life insurance comes in two basic flavors -  term and cash value -  plus a hybrid, universal life. The basic distinction between term and cash value insurance is that term insurance is pure life insurance, while cash value provides both insurance protection and a savings/investment feature. Beyond this basic distinction, how do they differ? And what about all those new variations on whole life and term insurance policies that have been recently introduced? The following glossary will help you make sense out of all the confusion.
 
 

LIFE INSURANCE POLICY ALTERNATIVES

Term

Term insurance only provides death protection. A term policy does not build a cash value. If the insured discontinues insurance premium payments, the coverage simply lapses after a specific grace period. This is the cheapest form of immediate insurance protection. There are many kinds of term insurance. Term insurance premiums increase with age for the same amount of coverage, although most people's life insurance requirements decrease with age. A renewable term policy covers the insured for a fixed period of years or until a specified age. With renewable term, the insured may usually renew the policy each year without a medical examination. Decreasing term provides constant premiums over time with a declining amount of death protection.

Whole Life

Also called straight or ordinary life. Requires level premium payments over the lifetime of the insured and provides cash value that increases slowly in the early years and more rapidly in the later years of the policy. The rate of increase in the cash value is predetermined. A number of variations are also available. Under a limited payment life policy, premium payments remain level up to a certain age and then cease. Adjustable life plans allow the insured to change both the premium payments and the face amount of the policy as needs and income vary.

Universal Life

Universal life permits flexible premium payments. The cash value portion of the policy is deposited into an interest-bearing account that is usually tied to a predetermined index. Most universal policies allow the insured to increase the death protection, although another medical examination may be required. Universal life insurance policies have been designed to provide considerable flexibility to the amount of coverage and the amount of premium.

Variable Life

The cash value portion of variable life is invested in one or more stock, bond, and money market funds of the policyholder's choosing. Therefore, the cash value will fluctuate based on the performance of these separate investment accounts.

Single-Premium Whole Life

Single-premium policies are paid up in one or very few installments. The emphasis in these policies is on investment, not insurance. Like other cash value policies, the cash values build up tax free.
 
 
 

USELESS INSURANCE

Credit Life

Credit life insurance is a life insurance policy issued on the life of a borrower to cover the unpaid balance on a particular loan in the event of the borrower's death. Credit life insurance should be avoided unless you're about the die. Lenders often try to strong-arm borrowers into buying this coverage to cover a substantial loan like an auto or home loan. Fortunately, in most states lenders cannot require this insurance as a condition of the loan.

Credit life insurance is almost always outrageously expensive. It is completely unnecessary so long as you already have adequate life insurance -  enough to pay off your loans while still providing for your dependents. If you want to take out life insurance to pay off a loan, purchase a less expensive term insurance policy and save a bundle of money. Years ago, the bank that gave me my mortgage tried to sell me a life insurance policy that would  -  in the event I died  -  pay off my mortgage. The first year cost: $710. I could have bought an equivalent term policy for $60!

Travel Insurance

You no doubt have seen ads for accidental death insurance in airports. Policies are sometimes sold right out of vending machines at what appears to be a ridiculously low cost. The cost is ridiculously low because the chances of your survivors ever benefiting from one of these policies are also ridiculously low. Don't buy travel insurance. Some credit card companies now offer travel insurance at an extra cost. Believe me, they are making a bundle on this outrageously expensive insurance.

Life Insurance for Children

When the new bambino arrives, you may be bombarded by people who want to sell you life insurance to tots. Often, it's sold on the basis of providing a college fund through a buildup in cash value. You don't need it. Almost anything you put your money in instead of a child's life insurance policy will end up being a better investment. If you want to use life insurance to provide Junior with a college fund, insure yourself and/or your spouse.

Tip-offs to useless Life Insurance

Life insurance touted on television or the radio by some down-on-his-luck celebrity, and any life insurance offers you receive in the mail, are useless. No, no, no.
 
 

 A PLAN FOR BUYING THE RIGHT KIND OF LIFE INSURANCE AT THE BEST PRICE
 

Once you have estimated the amount of life insurance that you need, and you understand the various types of life insurance that are available, it is time to become a wise insurance buyer. If you take control of the insurance purchase decision, you're bound to save money. If you use an insurance agent, understanding the alternatives that are available to you will help you get the right coverage at the right price. Even if you already have sufficient life insurance, the following tips may help you save money in the future, because most people over-pay for their life insurance coverage.

Term or Cash Value?

The debate over whether term or cash value life insurance is preferable will never be resolved. One thing is for sure, however: Term insurance is usually cheaper in the long run than cash value insurance, despite what the person who is desperately trying to sell you a cash value policy will say. If you're concerned about providing the most insurance coverage at the lowest cost now, buy term.

Nevertheless, many people have benefited, are benefiting, and will benefit from cash value insurance. People who are otherwise unable to discipline themselves to save regularly can benefit from cash value insurance's forced savings feature. Even disciplined savers can take advantage of the tax-deferral feature of cash value life insurance as part of a program for saving for retirement. In spite of the ever-present and annoying fees and commissions, the newer breed of cash value life insurance products can offer attractive tax-advantaged returns on the investment portion of the policy. The problem with trying to meet all or most of one's life insurance needs through cash value insurance is simply that it can become prohibitively expensive.

What's the upshot? Like most things in our financial lives, term versus cash value insurance should not be viewed as an either/or proposition. You may well be best served by a combination of term insurance to provide needed insurance protection for your dependents and cash value to provide additional life insurance protection and, more important, to accumulate tax-deferred savings.
 
 

SOURCES OF LIFE INSURANCE COVERAGE

You can do nothing but benefit from vigorous comparison shopping for the lowest price and best policy terms. Identical policies have carried price disparities as much as 1,500 percent. The following is a list of the many available sources of life insurance. As you can see, there are many ways to buy life insurance without an agent.

Employer-Paid Insurance

Your employer may already provide some insurance as part of your compensation package. If your employer pays the premiums, that's great. If you have to pay part or all of the premiums yourself, chances are that the coverage is still a very good deal. You may also have the option of purchasing additional life insurance beyond what the company provides. If so, investigate it, because it's very likely to be very attractively priced. Remember that if you leave your job, you may not have the option of continuing this life insurance. You or your family could be at risk if you have no additional coverage.

Social Security Benefits

Don't forget to include in your life insurance projections possible Social Security benefits that are available to survivors who have been paying into Social Security and meet certain conditions. Benefits may be available to a surviving spouse, surviving children who are under age 18 or are disabled, and dependent parents age 62 or older.

Savings Bank Life Insurance

If you live or work in Connecticut, Massachusetts, or New York, consider yourself  lucky, at least as far as life insurance is concerned. Savings banks in those states provide low-cost term and cash value coverage. The amount of the insurance is limited, but it is well worth investigating.

Low-Load Life Insurance Companies

Some companies are now offering both term and cash value insurance directly to the public. These policies have lower fees because they don't incur a sales commission, so the premiums are often quite attractive. You have nothing to lose by contacting these companies and asking for some information and a quotation.  The addresses and telephone number of several prominent low-load life insurance companies appear below.

Purchase Through an Agent

Although this alternative is listed last, it doesn't necessarily mean that purchasing insurance from an agent is the least desirable way to obtain coverage. Many insurance agents will work hard to find attractively priced coverage for you, and their advice can be helpful at times.

Games Agents Play

As when finding any good professional, ask your friends or co-workers for a recommendation for an insurance agent. It's so common to be dissatisfied with one's insurance agent that once you find someone who really appreciates what their agent is doing, you've probably found a marvelous one.

When dealing with an agent, be wary of a few things. First, it is not uncommon for companies to offer agents two otherwise identical policies with different commission structures. You guessed it -  the policy with the higher commission structure provides less attractive policy features than does the lower-commission policy. Don't be afraid to ask if you are thinking of making a purchase.

Second, be wary of agents who encourage you to cash in one cash value policy for another or a term policy. While there are situations where you may benefit  - for example, the new cash value policy may offer a more attractive rate of return than a policy you recently purchased  -  you are generally better off sticking with the old policy. By staying put, you'll avoid having to pay another commission, not to mention the hassle of filling out reams of application forms. If you do cash in a cash value policy, you can avoid paying taxes on it by transferring the money into an annuity or another life insurance policy.

Finally, be very skeptical of the policy projections that are provided to you. Many are just pie-in-the-sky, as a lot of policyholders found out amidst the declining interest rates of the early 1990s. For example, policies that forecast that they would be paid up in eight to ten years are requiring premium payments of 20 years or more because low interest rates are slowing the cash value buildup. (A paid-up policy is a policy that needs no further premium payments.) Therefore, the only life insurance cash value projections to believe are those based on the insurer's guaranteed minimum return.
 
 

For Further Information

You can save money by buying your coverage directly from low-load insurance companies like the ones listed below:
 
 

If you have lost your policy documentation, request a " policy search form" (make sure to include a stamped, self-addressed business-size envelope with your request) from: