Do You Have The Right Life Insurance Coverage?

December 08, 2014

Yeah, I know what you’re probably thinking. This is not the most exciting topic to think about and other areas of the financial life planning process such as money management, paying off debt, and investing for retirement tend to get more of our attention. Still, it’s worth a quick review on why life insurance is necessary and who should buy it. In fact, this part of the discussion should come before getting to specific amounts that you should own.

Term life insurance rates remain near historic lows and you may have heard that now is the time to buy. First, a quick definition of what term life insurance is. A term policy is a policy with a set duration on the coverage period -anywhere from one to 30 years or more- and when it reaches the end of that term, the policyholder decides whether or not to renew it. Term policies provide no cash buildup like whole or universal life insurance. They only provide a death benefit at the time the insured dies. Because term doesn’t provide that investment component, the cash value that can be borrowed against, term is generally cheaper to buy than whole or universal life.

There is some debate whether it makes more sense to buy term or whole life. Some critics argue that permanent life insurance is a poor choice because you arguably could get a better return from other investments. Yet there are some good purposes for these permanent insurance policies. Many use them as part of an advanced estate planning strategy.

But the first point is to decide whether you need insurance. People without dependents generally do not have a strong current need, while people with spouses and families (or those that plan on building a family) generally do. The primary point of life insurance is to replace the lost income if an income earner dies.

Here are some critical questions that should be asked when purchasing insurance:

1. How much income would your spouse and your children need to replace your income?
2. Will your spouse or guardian need to provide childcare support?
3. Do you have a mortgage to pay off?
4. Are there substantial short-term debts, like credit cards or auto loans, to pay off?
5. What are the estimated education expenses for children and spouses, and when will those expenses start?
6. How much will burial expenses be?
7. Do you have any other life insurance?
8. Are there anticipated expenses for taking care of elderly relatives or children or family members with special needs?
9. Do you anticipate substantial estate taxes when you die?
10. Do you have any other assets that can be liquidated in a reasonable amount of time or will bring in income?

Most online life insurance calculators found at most business news and personal finance websites can help you address many of these questions. Other require a bit more strategic thinking in terms of your estate planning concerns. Keep in mind that age and health will also be factors in determining how much insurance you can afford to buy.

Many term life policies are both “renewable” and “convertible.” Renewable means you can renew your coverage without a medical exam. The latter allows you to convert your term life policy into an equivalent cash value policy from the same carrier, should this make sense during the term of the policy. Again, the kind of coverage you choose should depend on your own personal needs and a financial planner can help you determine what those are.

Also, as you check various companies, it’s important to work with the most financially healthy carriers. Insure.com provides free ratings from Standard & Poor’s on various insurers, and many public libraries have subscriptions to ratings from A.M. Best. You can also visit Term4Sale.com to compare premiums across multiple insurance companies.

As for the decision on what kind to have, it helps to get some advice. A financial planner can help you determine how much and what type of insurance products to buy based on your needs and other assets. Better still, he or she can help shape your insurance purchases as part of an overall estate plan.

There is one more thing to consider. Don’t make the mistake of buying insurance and forgetting about it. Make sure that every few years you are reviewing your insurance purchases as part of your overall financial plan. Life circumstances change. Incomes rise and fall and family size changes. Your insurance holdings always need to reflect current needs and conditions.