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Life Insurance

By David Luhman on Mon, 05/11/2009 - 23:30

Life Insurance

Do you need life insurance?

How much insurance do you need?

Cash-value life insurance

Why you should avoid cash-value insurance

Term life insurance

Buying life insurance

Do you need life insurance?

Need life insurance to replace income for dependents

Single people with no dependents generally don't need any life insurance

Don't forget that you may have to support a elderly parent

Also don't forget that if your non-working spouse dies, it will cost money to replace the services your spouse provided

You may have to insure the life of both spouses if you have dependents

If you're fairly wealthy, you may not need life insurance

As you grow older, your net worth generally increases and the number of people dependent on you decreases

The need for life insurance generally drops as you age

Life insurance also has a place in

  • Business to insure "key" people
  • Estate planning when the estate is large or illiquid

How much insurance do you need?

Very difficult to give general rules

Some factors to consider

  • Your net worth (higher net worth implies less insurance required)
  • You or your children may qualify for Social Security survivor benefits
    • Average monthly payment for a widow(er) with two children is $1,350
  • Salary (generally need to replace 80 percent of income)
  • Life insurance proceeds are free of income tax but subject to estate tax
  • Ability of spouse to earn income
  • Many companies offer $50,000 in term life insurance as a benefit
  • Number of years dependents will need to rely on life insurance proceeds

Very rough rule of thumb

Get five to seven times your gross income worth of life insurance coverage

Cash-value life insurance

Sometimes euphamistically called "permanent insurance"

Combines simple life insurance with investment aspect

Comes in various flavors

  • The traditional "whole life" variety
  • The newer, more flexible "universal life" variety

Why you should avoid cash-value insurance

Very expensive commissions and on-going fees

Salesperson can easily make $2,000 in commissions by signing you up

Very high premiums

Perhaps $3,000 a year for $250,000 in coverage depending on age, health

Cash-value remiums are generally about four times higher than term insurance premiums

Most people drop their cash-value policies after a few years

Tax reform has reduced attractiveness of cash-value life

Best advice is usually to buy term life insurance and invest the savings in a retirement account

However, most of the life insurance sold is cash-value life

Probably because of higher commissions on cash-value insurance

Term life insurance

Simple life insurance with no investment angle

May cost $350 per year for $250,000 in coverage (depending on age, health)

Comes with different contract terms

Level premium

  • Your premiums don't increase during the term of the contract
  • Lock in premiums for the five, 10 or 20 year life of contract

Guaranteed renewable

  • Can renew the policy regardless of your health

Annual renewable

  • One year contract
  • Low premiums
  • Dangerous because premiums can shoot up if your health declines
  • Use for special situations when you may need extra insurance - perhaps for business purposes

Buying life insurance

Buy direct

Some sources to consider

Service Name Web Address Telephone
QuickQuote 800-867-2404
Quotesmith 800-431-1147
InsuranceQuote Services 800-972-1104
MasterQuote 800-337-5433

Visit library to check the financial health of your life insurer according to independent raters

  • A.M. Best
  • Weiss Research
  • Standard & Poors

Ask for non-smoking rates and look into other discounts

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