LIFE

How much life insurance do I need?

In most cases, if you have no dependents and have enough money to pay your final expenses, you don't need any life insurance.

However, if you want to create an inheritance or make a charitable contribution, you should buy enough life insurance to achieve those goals

If you have dependents, you should buy enough life insurance so that, when combined with other sources of income, it will replace the income you now generate for them, plus enough to offset any additional expenses they will incur replacing services you currently provide (for example, if you do the taxes for your family, the survivors might have to hire a professional tax preparer). Also, your family might need extra money to make some changes after you die. For example, they may want to relocate, or your spouse may need to go back to school to be in a better position to help support the family.

Most families have some sources of post-death income besides life insurance. The most common source is Social Security survivors' benefits . Many also have life insurance through an employer plan, and some from other affiliations, such as an association they belong to or a credit card. Although these sources might provide a significant income, it is rarely enough.

How should I choose what type of life insurance to buy?

You should consider term life insurance if:

• You need life insurance for a specific period of time. Term life insurance enables you to match the length of the term policy to the length of the need. For example, if you have young children and want to ensure that there will be funds to pay for their college education, you might buy 20-year term life insurance. Or if you want the insurance to repay a debt that will be paid off in a specified time period, buy a term policy for that period.
• You need a large amount of life insurance, but have a limited budget. In general, this type of insurance pays only if you die during the term of the policy, so the rate per thousand of death benefit is lower than for permanent forms of life insurance. If you are still alive at the end of the term, coverage stops unless the policy is renewed. Unlike permanent insurance, you will not build equity in the form of cash savings.

If you think your financial needs may change, you may also want to look into "convertible" term policies. These allow you to convert to permanent insurance without a medical examination in exchange for higher premiums.

Keep in mind that premiums are lowest when you are young and increase upon renewal as you age. Some term insurance policies can be renewed when the policy ends, but the premium will generally increase. Some policies require a medical examination at renewal to qualify for the lowest rates.

You should consider permanent life insurance if:

• You need life insurance for as long as you live. A permanent policy pays a death benefit whether you die tomorrow or live to be 100.
• You want to accumulate a savings element that will grow on a tax-deferred basis and could be a source of borrowed funds for a variety of purposes. The savings element can be used to pay premiums to keep the life insurance in force if you can't pay them otherwise, or it can be used for any other purpose you choose. You can borrow these funds even if your credit is shaky. The death benefit is collateral for the loan, and if you die before it's repaid, the insurance company collects what is due the company before determining what's goes to your beneficiary.

Keep in mind that premiums for permanent policies are generally higher than for term insurance. However, the premium in a permanent policy remains the same no matter how old you are, while term can go up substantially every time you renew it.

There are a number of different types of permanent insurance policies, such as whole (ordinary) life, universal life, variable life, and variable/universal life.

How can I save money on life insurance?

There are ways to save money when buying life insurance, but they don't always entail paying a lower premium immediately. As your top priority, look for a policy that meets your needs. Buying the wrong benefits for a low premium is a waste, not a saving. Beyond that, here are some ways to maximize your life insurance dollars.

Before you buy

Once you've determined what type of life insurance product to buy:

•  Focus on financially sound companies.
Dozens of companies sell life insurance. Limit yourself to companies with high ratings from two or more independent rating agencies. A low premium from a shaky company isn't a good buy. See How do I choose a life insurance company? for more details.

•  Shop around to get a sense of the premium you're likely to pay.
Quote services on the Internet may serve this purpose, or you can ask an agent or broker to get you a premium estimate.

As part of this research, determine which rate class you'll fit into. Most companies that sell individual life insurance have several different price classes-usually called "preferred (non-tobacco)," "standard (non-tobacco)," "preferred (tobacco)," and "standard (tobacco)." A small percentage of people have health conditions or histories that disqualify them for even "standard" rates. Many in this group will be offered insurance at "impaired risk" or "nonstandard" rates.

•  Look into group insurance.
Consider participating in your employer-sponsored life insurance program, even if you have to contribute to it financially. Employers often subsidize their group insurance costs, so it can be less expensive than individual life insurance. You might obtain coverage up to a certain level without providing evidence of good health, an advantage for some people. You'll probably pay premiums through payroll deduction, which can be a nice convenience. However, make sure to compare group and individual rates, as depending on your age and health status, group insurance may or may not provide a savings. In comparing group to individual life insurance, remember that if you have over $50,000 of group life insurance, IRS tables determine how much it costs to provide the amount over $50,000 and charges you taxable income for that cost.

•  Take care of yourself.
Find out into which rate class you'll be grouped and, if necessary, consider making some lifestyle changes-don't smoke, maintain a healthy weight and exercise regularly-to qualify for a more favorable rate class.

When you're ready to buy

•  Shop around to get a good rate.
Life insurance is a very competitive business, and you'll find differences of hundreds of dollars (for annual premiums) even among financially strong companies for essentially the same policy.

•  Consider the net cost index.
How can you compare two policies, one with premiums that start lower than the other but later are higher than the other? Or one with low premiums and a low cash value, the other with higher premiums and a higher cash value? Use a net cost index-a standard method for collapsing these variables into one number. The lower the number, the better, but ignore small differences (since the indexes are approximations based on assumptions, small differences might not signal true differences in values). The agent or broker with whom you're dealing, or the company from which you're considering buying a policy, will provide these index numbers.

•  Be aware of premium discounts for particular amounts of insurance.
Most companies offer rate discounts for specified insurance amounts. For example, you might actually pay a smaller premium for $250,000 of life insurance than for $200,000, or for $500,000 of life insurance than for $450,000, because a discount "kicks in" at the higher insurance amount.

•  Beware of "fractional premiums".
Typically, you can pay your life insurance premium once a year, once every half-year, once a quarter, or once a month. Although paying quarterly or monthly might seem to be easier to fit into your budget, some companies levy high charges for paying premiums frequently. Others levy quite small charges to do this. If a company levies high charges for paying more frequently, try budgeting so that you can pay your premium only once or twice a year.

•  If you're buying a term policy, look for renewal guarantees.
A renewal guarantee gives you the right to start a new term after the current one ends, paying a higher premium based on your current age, but without requiring you to undergo a new health exam or submit any other "evidence of insurability." Without the guarantee, you'd have to shop for life insurance all over again, and if your health has deteriorated, you might have to pay much more or not get it at all.

How often should I review my policy?

You should review all of your insurance needs at least once a year. If you have a major life change, you should contact your insurance agent or company representative. The change in your life may have a significant impact on your insurance needs. Life changes may include:

• Marriage or divorce
• A child or grandchild who is born or adopted
• Significant changes in your health or that of your spouse/domestic partner
• Taking on the financial responsibility of an aging parent
• Purchasing a new home
• A loved one who requires long-term care
• Refinancing your home
• Coming into an inheritance