The 10th anniversary of Sept. 11 was a stark reminder about the importance of preparing for sudden loss.
Life insurance is often the foundation for such preparations. In fact, it’s considered a core element of sound financial planning.
Yet tens of millions of Americans are not covered. Thirty percent of U.S. households do not have any life insurance coverage whatsoever, according to a 2010 survey by LIMRA, a research and consulting association for the financial services industry. That puts life insurance ownership at a 50-year low. And many others are underinsured.
So who needs life insurance and how much coverage is appropriate? A look at the answers to those essential questions and other concerns:
1. WHO IT’S FOR: A life insurance policy is about more than protecting your children.
You should have life insurance if you have children under age 18 — even though 11 million households in that situation do not, according to the LIMRA. But you also need it to protect anyone else who depends on your income if you die. That could apply if a spouse or partner would be financially distressed by the lost income, as well as if a parent, sibling or adult child is similarly reliant.
If you have no dependents and have enough money to pay your final expenses, you don’t need life insurance in most cases. Even the industry-funded Insurance Information Institute says so.
2. WHAT KIND: A term life policy should suffice for most.
Term is the most basic kind of life insurance. You pay a fixed amount each month for a specified period, such as 15 or 20 years. Its main advantages are lower premiums and a high degree of control and flexibility. You can renew automatically, for example, and you don’t have to tie up any money in long-term benefits. When the term is up, your coverage ends. You and your spouse may want to let coverage lapse once your kids are grown. The amount of the premium can then be put toward saving for retirement or other priorities.
So-called permanent life insurance — whole life, universal life, variable life — costs considerably more and has a savings or investment component. If you think you’ll eventually want permanent insurance, you can consider a convertible policy that lets you gradually shift from term to permanent as your income grows.
3. WHEN TO BUY IT: The longer you wait, the higher the cost.
Insurance companies charge you more the older you get. But a policy described as “guaranteed level term” means the payout amount is locked in once you purchase a policy. So it pays to buy when you are relatively young. The healthier you are, the better, too — good health equates to the best rates. You should consider buying it as soon as you have a child.
For example, a healthy, non-smoking 35-year-old man can get a $250,000 policy for as little as about $160 a year and lock in that rate for 20 years, according to www.accuquote.com , a life insurance quotes provider representing insurers. The same coverage more than doubles in cost by age 45 and more than triples by 50, to $505 and $945 respectively.
4. HOW MUCH: It’s easy to buy too much coverage or not enough.
To determine your needs, calculate the amount of income that would need to be replaced and factor in a total for other important needs when you die — a mortgage, kids’ college tuition, expenses that arise at death.
Another rough guideline is to tally your outstanding debt plus five years’ salary. Still, you may be able to get by with less than this suggestion by MetLife, the nation’s largest life insurer.
But be careful not to skimp, either. Fifty percent of U.S. households surveyed by LIMRA identified themselves as underinsured. That can happen if you count solely on an employer’s group life insurance policy or don’t adjust your own policy for rising income.
Buying a larger policy can be cost effective because the marginal cost of additional coverage decreases as the policy amount climbs. For instance, that same 20-year term policy that would cost a 35-year-old man $160 a year for $250,000 of coverage would still be as little as $265 for a $500,000 policy offering twice the coverage. You should get quotes from multiple insurers at www.lifequotes.com or www.accuquote.com .
5. WHY NOT INSURANCE AS AN INVESTMENT: There are better ways to invest.
Universal, whole life and variable life insurance policies do more than pay out when you die. By paying for more than a term life policy and continuing your premiums indefinitely, your policy accumulates cash value over time.
This approach can work as a method of “forced savings,” because you’re highly motivated to make those monthly payments with your policy at stake. But you can invest by other means and do at least as well as by paying an insurer if you have the discipline to sock the same amount away. “Using costly insurance contracts primarily as investment vehicles is generally inferior to purchasing low-cost, term life policies and investing the difference yourself,” says Rande Spiegelman, vice president of financial planning for the Schwab Center for Financial Research.
Check with a financial adviser if you want to buy permanent life insurance or are uncertain about your needs.
Personal Finance Writer Dave Carpenter can be reached at http://twitter.com/scribblerdave .