CHAPTER
19

Choosing Life Insurance

In This Chapter

• You need life insurance
• Different types of life insurance
• Choosing the insurance that makes sense for you
• Knowing how much insurance you need
• Finding a good policy you can afford

When you’re young and getting started financially, the thought of buying life insurance might not have even crossed your mind.

A 2015 survey by LIMRA, an insurance research and consulting firm, showed that fewer than 20 percent of millennials say they’re likely to buy life insurance. What’s more, 3 out of 10 said saving for vacation was a bigger priority than life insurance, and 60 percent reported that paying cable, internet, and cell phone bills was more important.

In this chapter, we look at why you might need life insurance and explore ways to find a policy that makes sense for you.

Nearly Everybody Needs Life Insurance

If you are young and healthy with no dependents and no debt, maybe you don’t need life insurance. For everyone else, life insurance is a good idea.

The point of life insurance is to provide for those who depend on you. Your life insurance also would be used to pay off any debt you owe. So if you have college debt, credit card debt, a car loan, mortgage, or any other type of debt, think about who would be responsible for paying it if you died and whether having to pay off your debt would negatively impact their finances. If your parents cosigned a loan for you, they would be responsible for it if you died. Think about how well they’d be able to handle that financial responsibility at this point of their lives.

If you have a job that includes benefits, you might be covered for life insurance through an employee-provided group policy. If so, be sure you understand the terms of the insurance and how much would be paid out in the event of your death. Also, find out if it’s possible for you to increase your coverage if you pay for additional insurance. You might be able to get an affordable rate as part of a group policy.

If it’s just you, you should have enough life insurance to cover your funeral and other final expenses and any outstanding loans. If you’re married but have no kids, you should have life insurance if your spouse would have to dramatically change his or her lifestyle if you died. If you have kids and support a family, you definitely need life insurance.

Let’s look at different kinds of life insurance and what kind might make sense for you.

Term Life Insurance Versus Cash Value

In general, there are two basic types of life insurance: term life insurance and cash value insurance (also known as permanent, whole-life, variable, or universal insurance). Most people benefit more from term insurance than cash value insurance when they’re young. Cash value insurance, which is actually a type of investment vehicle, might make sense for older people who use it as part of their estate planning, or for families who want to pass along life insurance to their heirs.

Definition

Term life insurance is a policy in which you pay an annual premium in exchange for a predetermined amount of money that will be paid to your beneficiaries if you die during the term you’re insured. Cash value insurance combines a life insurance policy with a type of savings or investment account, and you actually earn interest, or appreciation, on part of the money you pay into the plan.

Term life insurance is the least-expensive kind of life insurance. In exchange for your annual premium, term life gives a predetermined amount of money to your beneficiaries if you die during the term you’re insured. All you need to do is continue to pay the premium. The premium keeps increasing as you get older, however, and someday it might become prohibitive. It’s a good idea to review your policies periodically to be sure they make sense for you.

Cash value insurance combines life insurance with a sort of savings or investment account. Your premiums not only ensure your survivors receive money if you die, but in addition, some of the money from the premiums is credited to an account that should increase in value as long as you keep paying premiums.

Which Type Makes Sense for You?

Cash value insurance might sound like a better deal because you think you’ll be getting something back from it. An agent who sells cash value life insurance will tell you that after you pay on the policy for so many years (usually 15 or 20), your policy will be all paid up and you won’t have to make more payments. The problem is that cash value insurance is much more expensive than term to buy when you’re young, and the only reason you might be able to stop paying premiums at a certain time is because you’ve already paid in a great amount of premiums.

There’s an argument for buying a cash value policy at a young age. When you buy term life insurance, you need to provide proof of insurability to get a new policy when the current term expires. If it turns out you’re uninsurable due to an emerging disease or other medical problem, you could end up without life insurance. A cash value policy can’t be cancelled as long as you continue to make the premium payments.

Agents love cash value life because they get a much higher commission selling it than they do term policies. For that reason, some agents might try to steer you in that direction. Don’t let an agent or broker talk you into buying cash value insurance, though. At this point in your life, unless there are special circumstances, it’s not likely you’ll need it.

Dollars and Sense

Cash value insurance can cost up to eight times as much as term life insurance for the same amount of coverage. Unless special circumstances exist, like if you’re very wealthy and anticipate an estate tax problem if you should die, term insurance is a better deal for young people.

How Much Life Insurance Do You Need?

Knowing how much life insurance you need isn’t always easy to determine. As stated, if you’re single or married with no children, you can get away with less than if you have a family to support.

To ensure that your family can continue the lifestyle to which they are accustomed, you’ll need to have a look at several things. Other than your mortgage, what kind of debt do you have? If you have debt, you need to have enough life insurance to pay it off, in addition to being able to continue to support your family. The next thing to consider is how much money you spend every month. Look at your bank statements or use a personal budget software package to determine how much you need each month.

This is important because you can’t ensure your family will have enough money to live comfortably if you don’t really know how much money that requires. The point of having life insurance is to protect your family and help them achieve the goals you would have been working toward if you had continued to earn.

Money Pit

Never decide to buy a certain amount of life insurance because it’s what your brother or best friend has. Everyone’s circumstances are different. For example, your brother might need only half the amount of insurance you do.

In addition to long-term financial goals, your spouse would need to have money to fill in the gap left by the loss of your salary. Your household bills and expenses would remain relatively the same, after all.

The rule of thumb used to be to buy life insurance equal to 10 times your yearly salary. If you earn $50,000 a year, you’d buy $500,000 worth of life insurance. Many financial experts, however, say that rule is outdated and doesn’t consider certain factors like debt, savings, and whether you already have a group life insurance policy through work. Also, that rule implies that if one spouse stays at home to care for children and has no income, there is no need for life insurance. Most financial advisers agree both parents should be insured.

If you want to get an idea of the amount of life insurance you should buy, use this formula:

1. Calculate how many years your family would need replacement income for your salary. Using the year your youngest graduates from high school as an end date probably is reasonable.

2. Multiply your salary by the number of years your family would need replacement income for your salary.

3. Add to that number the balance of your mortgage; the total of all other debt such as college loans, car loans, and credit card debt; and funeral costs.

4. Add to that an estimated amount for the cost of college for your children. (You can find a college cost calculator at the College Savings Plans Network website at collegesavings.org/college-cost-calculator.)

5. Subtract from that number the amount of savings you have in place, including retirement savings, college funds already saved, and proceeds from group life insurance.

After you’ve done the math, you’ll know how much life insurance you need.

Let’s look at an example: Tom, 36, and Kate, 34, have been married for 5 years and have two daughters, ages 4 and 2. Tom earns $60,000 a year, and Kate, who works part-time, earns $27,000 a year. To figure out how much life insurance he should buy, Tom would …

1. Calculate the number of years before his younger daughter graduates from high school. That’s 16.

2. Multiply his salary, $60,000, by 16. That comes to $960,000.

3. Add to $960,000 the amount of his mortgage and all other debt. Tom has a mortgage for $150,000, credit card debt of $2,000, a car loan for $12,000, and college loan debt of $8,000. The median cost of a funeral with a casket is $7,000. All those costs total $179,000. When added to the $960,000, Tom’s number is now at $1,139,000.

4. Calculate and add the cost of college for his girls to his total. The college calculator tells him it will cost about $410,000 for his daughters to attend an in-state, public university for 4 years, including room and board. When added to the previous total, Tom’s number is up to $1,549,000.

5. Subtract their $18,000 savings and Tom’s $175,000 group life insurance benefit at work from his total. Tom needs to have a term policy worth $1,356,000.

Kate would calculate her needs the same way, taking into consideration costs associated with childcare and whether she would move into a full-time job.

You can get instant quotes from different insurance companies by using an online insurance broker like AccuQuote (accuquote.com), LifeInsure.com (lifeinsure.com), or FindMyInsurance (findmyinsurance.com). All you do is enter your basic information such as your age, health status, and the amount of insurance you want, and you’ll be given policy prices from numerous companies. When you see the quotes, you can request an application and get more information about the plan if you want.

Pocket Change

Using Tom from our previous example, when we submitted his information to FindMyInsurance, estimated costs for a 30-year term policy worth $1,400,000 came in from about 20 different companies showing he would have to pay about $110 a month or $1,223 a year for his life insurance.

When you’ve identified a company that offers a good price, check the insurance company’s rating on a site like TheStreet (thestreet.com) or Standard & Poor’s insurance ratings (standardandpoors.com).

Here are TheStreet’s top 10 picks for life insurance in 2016:

• State Farm Life Insurance Company (statefarm.com)
• American Family Life Insurance Company (amfam.com)
• Country Life Insurance Company (countryfinancial.com)
• State Farm Life and Accident Assurance Company (statefarm.com)
• Massachusetts Mutual Life Insurance Company (massmutual.com)
• Guardian Life Insurance Company of America (guardianlife.com)
• New York Life Insurance and Annuity Corporation (newyorklife.com)
• Southern Farm Bureau Life Insurance Company (sfbli.com)
• USAA Life Insurance Company (usaa.com)
• Northwestern Mutual Life Insurance Company (northwesternmutual.com)

Obtaining a life insurance policy probably will require a physical exam or at least a visit from a nurse for a blood pressure check and various other tests. When you’ve secured a life insurance policy, maintain the best health possible in case you need to shop for new coverage.

As with any insurance, the hope is that you won’t need it. In the meantime, you’ll have the peace of mind of knowing your family will be taken care of in the event of your death.

The Least You Need to Know

• If you haven’t thought about life insurance yet, you probably should.
• Term life insurance makes the most sense for the majority of younger people.
• You’ll need to consider many factors when determining how much life insurance you need.
• Comparing policies and costs can help you find the insurance you need at an affordable cost.