Life Insurance: Something for Everyone
Life insurance replaces the financial contribution made by a person who has died unexpectedly. Life insurance is not meant to be a lottery windfall to your family; it's meant to let your beneficiaries carry on with their lives once you're gone. That means you should carry coverage on yourself if others rely on you, and carry coverage on anyone you rely on. Important people to consider could be your partner, spouse, parent, child, or business associate. Their financial contribution can come in a variety of forms: their salary contributed to your joint family income, their time contributed to raising your kids or caring for your parents, or their efforts were important to the success of your business, which could suffer from their loss.
Many employers offer group life insurance, but you need to buy your own policy as well. Employer-provided coverage ends when your job ends, but your need for life insurance might not. Don't take a chance of dying between jobs, leaving your beneficiaries unprotected. Carry your own policy in addition to your group coverage.
Basic Types
Life insurance comes in the form of either term or permanent insurance. Term insurance offers coverage for a limited period of time. Permanent insurance has an extra internal investment component that potentially builds value to support the policy for an indefinite length of time.
Term insurance is commonly named for the length of time it will be in force. Annual renewable term, or ART, has a premium that starts low but increases as it renews every year. Ten-, twenty-, or twenty-five-year level term policies have premiums that start higher than ART, but then stay level for ten, twenty, or twenty-five years, at which point the policy ends. If you die beyond the coverage period, no payment will be made. Group term insurance is provided by many employers and has a premium that increases every year.
Permanent insurance policies feature an extra savings component that is invested and whose value can be called upon to cover the cost of the policy as you age. Whole life insurance is invested with the insurance company, which makes guarantees about the policy's performance. Universal life insurance policies invest the premiums, and returns on those investments help offset future premiums. Variable life policies invest premiums in stocks and bonds and, as with universal life policies, the returns help offset premium costs.
My parents bought a whole life policy for me when I was young. Should I cancel the policy and just carry term insurance now?
If the policy is old enough and written by a strongly rated company, it may be supporting itself on dividends and you may not need to even pay premiums to keep it active. Keep the policy and reduce the amount of other term policies by the amount this policy would pay.
Who Needs It?
The death benefit, of course, is the most important feature of a life insurance policy, especially in your 40s and 50s. Life insurance costs more as you get older; focus on purchasing the death benefit you need in a good, inexpensive term life policy, and don't get wrapped up in an expensive and difficult-to-change permanent policy.
Because life insurance premiums are based on your age when you apply, minimize the chance you'll need to apply again by planning ahead. Make sure the term you buy is long enough to cover your needs. For example, the term must include the time it will take your kids to grow to independence, the time it will take to pay off your mortgage or accumulate the retirement nest egg, or the time you'll be relied upon by an aging parent.
Permanent life insurance is called for in some complex estate or business applications. Your estate or business attorney can help you decide if your situation warrants using this product. Be sure you understand what you're buying by having an independent insurance advisor review your plan.
Make sure you buy enough death benefit by adding up the financial contribution — salary and expenses they're paying — of the person you're insuring. In most cases, you'll need four or five times her annual earnings.
What to Look For
Make sure you pay for enough death benefit, but don't overspend. Compare the total cost of annual renewable and level term over the time you'll need the policy. If you're unsure, buy a longer term and plan to cancel it if the need ends early.
Buy from a strong insurance company. Your death benefit is only as safe as the strength of the insurance company. Stay with companies who are rated “superior” or “excellent” by Moody's, A.M. Best, Weiss, or Standard &Poor's.
Life insurance should be a very straight forward financial product. It pays a death benefit if you die during the time the policy exists. Don't buy a product you don't understand.
The death benefit of life insurance isn't taxable to your beneficiaries, but if you own your policy yourself it may be taxable to your estate. Avoid this costly penalty by having your estate planning attorney guide you on how to structure ownership of your policy. You may need to assign ownership to another individual or a trust.
Estate Planning and Beneficiaries
Life insurance benefits pass to the beneficiaries listed in the policy, regardless of what your will says. Ask your estate attorney for language to use in the policy if your young children will be the beneficiaries. Review your beneficiary designation if your life changes, especially if you get married or are divorced or widowed.
