and Evaluating Life Insurance
Life insurance is
really very simple. If you die, it pays off. Its purpose is also simple;
it should protect those that rely on you. It should not be viewed as an
investment. It is easy to get confused about this emotional issue. But
really there are only three questions you need to answer.
Do you need life
Life insurance should provide financial protection for your loved ones
in case you die. If you have no spouse or children, life insurance may
be unnecessary. If you are married and your spouse can handle living expenses
without you, it may be unnecessary. However, if you have loved ones that
need the financial support you provide and will provide in the future,
you should consider life insurance to make sure they will be adequately
protected and cared for.
If life insurance
is needed, how much?
The answer to this question is not always simple. The basic rule is that
life insurance proceeds should allow your loved ones to have the same
financial lifestyle they would have had if you were still living.
One rule of thumb
is that you should have a policy that would pay six to eight times your
pretax income if you die. But, many find they need more than that. If
you have young children and want them to be able to afford college educations,
you may want more. If you are older and already have accumulated substantial
wealth, you may want less and see life insurance as part of a total estate
A more detailed determination
of the amount of life insurance you need should take into account the
- Your family's
cost of living
- Income from earnings
of the surviving spouse
- Benefits from Social
- Investment or income
- Life expectancies
- Special needs for
There are many books
and resources available at libraries, on the Internet or from financial
advisors that can help you make a more accurate estimate. It is probably
to err on the high side rather than leaving your family under protected.
What type of policy
is best for you?
There are two basic types of life insurance policies - term and cash value
whole life. Their costs are dramatically different.
annual premiums for $100,000 of coverage
The most basic form is called term life insurance. Term life insurance
is pure protection. Its only purpose is to pay your beneficiary if you
die. It is generally much cheaper, especially at younger ages. But the
cost of term insurance goes up as you get older. Term policies provide
protection for a specific number of years. When that term runs out, you
will need to apply for another policy. That is why it makes sense to get
as long as term as possible.
Cash value whole
Most insurance agents urge their customers to buy the more expensive cash
value type of life insurance. These policies provide death benefits and
also enable the policyholder to build up a "cash value" that acts as a
savings account. The earnings on this "savings" account is tax-deferred
and you can usually borrow against it if you need money. These policies
are also generally permanent. In other words, once you buy them and continue
to make the premiums they remain in existence. Many of them also allow
you to continue to have protection after paying for a number of years.
The real issue with
cash value policies is that they are expensive. Usually there is a large
commission paid to the agent and the earnings rate on the "savings" account
portion is usually relatively low. You may want to do a calculation that
compares the two. Assume you can invest the difference between the two
premiums and compare what that grows to with the build up of the "savings"
account portion of the cash value policy.
Another issue to
There may be sources of life insurance available that are cheaper than
what you would find shopping on your own. Many employers offer group term
insurance as part of their employee benefit program. There are also many
organizations that provide special group life insurance programs for their
members. Professional organizations, like accountants, attorneys and medical
professions have programs specifically tailored for their members. They
are often able to negotiate very favorable rates. You should check out
these types of sources.