Life Insurance
You may or may not need life insurance, depending on your personal situation. If you don't need it, don't buy it. It may give you a false sense of security but you'll be wasting your money. To figure out whether or not you need life insurance, consider its purpose, which is to replace income in the event of the policyholder's death. If you're single and have no dependents, nobody is relying on the income you bring in, so you don't need life insurance.
However, if you're certain that you want to have a family (and you are otherwise financially healthy — eliminating debt, saving for retirement, etc), you might take a look at a “term” policy. By purchasing a policy while you're young, you lock in lower costs. Further, you can buy a policy before any health problems rear their head and you become uninsurable (or insurance becomes more expensive due to your health problems).
If you're a stay-at-home parent and aren't making a significant contribution to the household income, you probably don't need life insurance. The money could best be invested or used elsewhere. On the other hand, if your salary is important to supporting your family, paying the mortgage, or sending your kids to college, life insurance can ensure that these financial obligations are covered in the event of your death.
Should I buy life insurance policies on my kids?
Although insurance companies use advertising that pulls on your heartstrings to encourage parents to buy life insurance on their kids, it's unnecessary. Your kids don't produce income and therefore their lives don't need to be insured. You'd be better off putting the money you'd spend into a savings account.
How Much Insurance Do I Need?
The amount you need depends on your other sources of income, the number of dependents you have, your debts, and your lifestyle. There's no hard and fast rule of thumb, but the general guideline is between five and ten times your annual salary.
To estimate your need, list your family's annual expenses, such as the mortgage, day-care expenses, debt payments, and educational costs. Multiply the total by the number of years you need the insurance to cover. For example, if you have a child who has four years of high school ahead, you need coverage for at least four years. Add the costs of the funeral and burial of the insured person. If you can afford the premiums, consider adding in the total balance of your mortgage so your family can pay it off after your death, as well as the cost of sending your kids to college.
The cost of pure life insurance is based on actuarial tables that project your life expectancy. If you're considered a high risk — for instance, if you're overweight or a smoker, have a preexisting health condition, or have a dangerous hobby or occupation (such as flying)—you'll pay higher rates. It's not a good idea to lie about any of these factors on your application. The insurance company could end up refusing to pay your beneficiaries if they find that you didn't tell the truth, the whole truth, and nothing but the truth.
Your employer may provide a basic amount of life insurance at no cost (one or two times your salary) and allow you to purchase additional coverage at group rates, which are often lower than you could find on your own.
Life insurance comes in a wide variety of flavors. In general, you can think of two major categories: term insurance and permanent insurance. Term insurance is plain-vanilla insurance, and it's adequate for most young people. Permanent policies can be further broken down, and a few varieties are described below.
Term Life
Term insurance is “pure” insurance that offers a predetermined death benefit if you die within the term covered, but doesn't build up a cash value during your lifetime. (By comparison, whole life insurance offers both a death benefit and a cash value, but is much more expensive.)
The life insurance that many employers offer to their employees is generally term insurance that is in force only during your period of employment with the company. If you die during that time, your beneficiary receives the life insurance proceeds. If you leave the company your policy terminates, unless you convert it to an individual policy.
If your employer doesn't offer term life insurance, you can buy a policy through an insurance agent. The cost will depend in part on your age, your health, and whether you smoke. A healthy thirty-year-old man could expect to pay approximately $300 a year for $300,000 of term life insurance. To buy the same amount of whole life insurance would cost over $3,000.
Whole Life
Whole life is part life insurance and part investment. A portion of your premiums goes toward the insurance coverage, a portion goes toward administrative fees, and a portion goes toward the cash value or investment. You have no control over how the insurance company invests the cash value. Unlike term insurance, whole life covers you for your entire life. The premiums remain fixed. You can borrow against the cash value or cash the policy in, but it takes a number of years to build up any real cash value because large commissions and fees eat up most of your premium in the early years. Some experts say you lose money if you cash in a whole life policy within the first twenty years.
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Variable and Universal Life
The difference between regular whole life insurance and variable life insurance is that variable life policies allow you some choice in what your cash value will be invested in, though you can usually only put it in investments your insurance company manages. With variable life, the amount of your life insurance coverage (and the required premiums) fluctuates depending on how well the investment portion is doing.
Universal life insurance differs from variable life in one important aspect. In universal life policies, the pure insurance part of the policy is kept separate from the investment part of the policy. The insurance premium costs are paid out of the proceeds of the investment part of the policy. Universal life offers more flexibility in the death benefit and the annual premium. In years when the investment portion does well, you may choose to put more of the money into building up the cash value. In years when the investment doesn't do as well, you may elect to reduce premiums or let the entire premium for the year be deducted from the investment account. You pay for this flexibility in higher administrative fees.
Which Type of Insurance Is Best?
Many financial experts recommend that you keep your life insurance and your investments separate. If you need life insurance, buy term life. If you want to invest money, do it yourself. Why pay thousands of dollars in commissions and administrative fees? If you're convinced that you want a whole life policy, consider consulting with a fee-only insurance advisor who, for a fixed fee, will research the various policies available to you and recommend the one that best suits your needs. Make sure the advisor isn't affiliated with any particular insurance company and receives no commissions so you can be sure you're getting objective advice.
