Life Insurance: Peace of Mind for You and Your Loved Ones

If the state of the world -- collapsed bridges, devastating hurricanes, and conniving terrorists -- has you wondering if you should get some life insurance to protect your family, I'm here to tell you it's high time. Do you already have some, but now you find yourself wondering whether it's enough, or if your insurer is still solvent? Keep reading, because I've got some good news for you.

If you haven't priced life insurance lately (or at all), you may be surprised at how inexpensive it can be from some of the safest insurers around and for terms that will meet your needs. True, it won't solve all the practical and emotional problems that have to be faced in the case of an unexpected death, but at least you'll know that your loved ones will have enough to make ends meet.

Do You Really Need It?

Decide if your family needs life insurance by taking this little quiz. (Don't worry, it's open-book.) Answer yes or no to these five questions:

1. Are your children financially dependent on you?
2. Are you or your partner a stay-at-home parent?
3. Without you, would your family need financial help?
4. Are elderly parents likely to need money from you?
5. Do you plan to put your kids through college?

If you answered yes to one or more of these questions, you and your partner probably need life insurance.

I'm amazed at the number of intelligent, thoughtful people, including many I know and love, who have no life insurance at all. Maybe on some level they think something awful will happen to them if they buy a policy. Superstitions aside, it's virtually guaranteed that their families will suddenly be thrown into an awful financial bind if they don’t have a policy. It's bad enough that they would be grieving. Don't let your personal issues about death and dying get in the way of providing financial protection for your loved ones.

Who Should Be Covered?

It used to be that only breadwinners were insured. Not so anymore. Stay-at-home parents serve an indispensable function in families and society. While no amount of money could make up for the loss of a parent, the kids would still need childcare and baths, meals would still have to be cooked, clothes would still have to be laundered -- and then there's all the shopping, cleaning, car pooling, bill paying, and errand running that would still need to be done.

In other words, if you're a young parent or not-so-young parent -- whether breadwinner or stay-at-home mom or dad -- life insurance is a must. End of sermon.

How Much Insurance Is Enough?

Experts generally recommend enough to cover between five and eight times your annual salary. But like most rules of thumb, this might not be feasible for you. Your goal should be to pick an amount that would cover the expenses that your family's other income can't cover, not one that gives them so much money that their life without you -- financially, at least -- would be dramatically better than the original.

Take a hard look at your short and long-term financial needs, your debts, your financial resources, and your comfort level … as well as your family's comfort level. Credit.com’s online life insurance calculator can help. Also speak with a few local brokers and agents.

What Type of Policy Should You Get?

You can buy a term policy (insurance for a defined time period) or a cash-value policy (one which combines life insurance with investments, for example whole life, universal life, and variable life). Like virtually every other consumer advocate and personal finance expert, I think that the best buy for most of us is a term insurance policy.

Important: Be sure to lock in for the full term! Choose a policy for the full amount of time you'll need coverage -- for example, until your youngest is done with college. Once the term ends, the premium can and invariably will rise, often dramatically, especially if your health has deteriorated. What's worse, you may not be allowed to renew the policy at all.

Take it from me. I know first-hand that life threatening illnesses like cancer and even quite treatable medical conditions like high blood pressure can quickly change your insurance options and cost.

"Gulp," you may be thinking, "I can't afford to commit to insuring five to eight times my salary!"

Not to worry… at least not about the cost of the premiums. For example, meet Max and Emmy. He's 40, she's 35, and the youngest of their three children is 2. Max makes $62,500 a year at his full-time job, while Emmy’s staying home with the kids right now.

They want coverage until the baby's finished college, some 20 years from now.
Five times Max's $62,500 salary is $312,500. But Emmy and Max want to play it safe and decide they want eight times Max’s salary instead: $500,000. And they want that amount of coverage on each of them.

Assuming they're both in good health, they could get a 20-year, $500,000 term insurance policy on him for about $40 a month. On her, it'd be around $28 a month. I know budgets are tight, but I think everyone can come up with $68 a month. After all, how much do you spend every month on cable, meals out, the gym, videos, junk food, etc.?

Find Out for Yourself

Take a look at the table below to get a sense of how much you'd have to pay per month for different amounts of life insurance. In compiling these figures, I focused on residents of one mid-sized city. The prices in the table are fairly representative as of the time of writing, assuming the insured person is in good health and doesn't smoke.

How to Read this Table

These figures are the average monthly cost for 20-year term insurance policies for healthy non-smokers who live in a mid-sized city. For example, a 35-year-old non-smoking, healthy woman could get a $500,000, 20-year policy for $28 a month, $750,000 for $41 per month, and $1,000,000 for $49 per month.

For a more accurate sense, check for price quotes using one or another of these services:

1. Insure.com -- 800-324-6370
2. QuickQuote -- 800-867-2404
3. Insweb – 800-275-8753

You'll get ballpark quotes as well as a sense of the financial stability of the insurers as determined by one or more major safety rating agencies. It won't take you long. I promise!

Before Choosing a Policy

Find out the answers to these three questions:

1. Are the premiums guaranteed or could they actually rise? Under what conditions?
2. Is there an exclusionary period, perhaps 2 years, during which the death benefit will not be paid (because of suicide, a pre-existing condition, or because the policy is issued with no medical exam)?
3. Should you simply supplement your policy at work? Many employers who offer term insurance as a perk also give employees the chance to buy supplemental term insurance at group rates. Compare these rates to the term life quotes you get on your own. Before you decide, be sure to find out how these supplemental group rates might change if you leave your job and want to retain the coverage.

Be Forewarned: There Will Probably Be a Test!

Especially if you're looking for a large policy, a medical exam may be required. High blood pressure, heart trouble, and signs of drug abuse will raise your cost. Similarly, if you smoke, drink, eat too much, lead a stressful life, have a history of health problems, or enjoy dangerous hobbies, the price will go up. As always, one of the best investments you can make is in your health.

Tip: Visit AccuQuote for advice on how to prepare for an insurance medical exam.

Do a Safety Check

If your insurer goes belly up and you need to replace your policy, health problems you didn't have when you originally signed up could make the premiums a lot more expensive. Fortunately, it's easy to keep tabs on the ratings of insurers because several agencies grade their overall financial strength. Here are three free services:

1. Standard & Poor's -- 212-438-2400
2. A.M. Best -- 908-439-2200
3. Moody's -- 212-553-0377

Look for a company that has a strong rating from these three services. Sounds easy, doesn't it? Unfortunately, it won't be that simple. Each rating agency uses its own criteria and scoring. Make sure you understand a rater's grading system before you rely on its score.

After you've bought a policy, check the insurance company's safety ratings from time to time. If your insurer's health has deteriorated, you may want to shop for a comparable policy from a company that's in better shape.

Answers to a Couple of Common Questions

Q: Should you insure a young child?
A: While no amount of money can replace a child, the rates are temptingly low. But unless your kid is a celebrity, don't bother. Make sure you have the right amount of coverage on both parents to replace the loss of their income and services.

Important: The same is true of credit card, life, and disability insurance offered by credit card issuers. You can do better with private policies.

Where to Go for More Info on Life Insurance

Read " What You Should Know About Buying Life Insurance ," published by the American Council of Life Insurance and the U.S. Office of Consumer Affairs. It will help you decide how much life insurance you need and how to choose a company or agent.

Visit the Insurance Information Institute as well as the other websites I've mentioned. It won’t hurt and it will protect your loved ones!

______________________
Nancy Castleman has spent 20+ years helping people get out of debt, save money, and live better on less. She considers her book, Invest in Yourself : Six Secrets to a Rich Life (Wiley, 1998, 2001), to be her life's work. It explains how to invest your time, energy, and money to create the life you want.

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