There are many factors that go into how much you should spend on
life insurance, but
as a rule of thumb: If there is anyone who depends on you financially -- a
spouse, kids, elderly parents or a disabled loved on -- buy sufficient life
insurance to replace your salary and other kinds of income, such as your
employer's contribution to your heath insurance premium or matching funds for a
retirement plan.
Even if you don't have children, you might want to buy life
insurance to pay off the mortgage on
your home, if making the payments requires two incomes.
You may also want to set aside funds for any changes your dependents would need
to make after your death, such as moving closer to other relatives who can help
care for them.
When considering life insurance, you have two basic choices. Term insurance
pays only if a death occurs during the life of the policy, typically between no
more than 30 years. Typically the premium and the size of the payout remain the
same through this period.
Jack Hungelmann, an insurance agent and the author of
Insurance for Dummies, says this is the best solution for most people.
Choose a term long enough to cover you until your youngest child finishes
colleges. In most cases, you won't have reached an advanced age and will remain
relatively healthy before the term expires. This keeps the cost down, since
fewer people collect.
Whole life insurance, also known as permanent insurance, is more
expensive, but pays the same death benefit whenever you die - no matter how old
you are. In order to keep the premiums level over the life of the policy,
insurance companies set the rates high enough so that the money they collect in
the early years offsets the later years' increased risk.
The difference between the premium in the early years and the actual cost to the
insurance company of insuring you is called “cash value.” It is set aside in a
savings account; your investment options vary with the type of policy.
You may be able to borrow against the value, and if you opt not to renew your
policy, you can get some of it back. In later years, when the premium you pay
not longer covers the cost of insuring you, the savings is drained.
Hungelmann says whole life is the best option if there is someone who will
always need your financial support, such as a disabled child. But most people
should stick with term life.
“The biggest problem with permanent insurance is it's not as good a buy; young
people with kids who buy permanent insurance typically have much less than they
need because it is so expensive,” he says. As a result, “they are way
under-insured.”
For example, a healthy, 30-year old male will typically pay less than $1 per
year for a thousand dollars of coverage with term life
insurance; by comparison, the
same amount of whole life costs $5 to $10 per thousand dollars of coverage.
Bread winners aren't the only ones who need insurance. Hungelmann says anyone
providing a benefit for the family but not earning outside income should have
between $250,000 and $500,000 of coverage. And not just because it would cost a
lot to hire a nanny and a housekeeper. “If your kids lose their mother, it would
be nice to be able to afford to take time off to help them cope with the loss,”
he say
Make sure the term life insurance you purchase can be converted into whole life.
Even if your kids are out of school, and on their own, you might find you need
permanent insurance if, say, your spouse developed Parkinsons. And when
converting a term-life policy into a whole-life policy you are guaranteed
preferred rates (rates for healthy people), even if your health has deteriorated
in the meantime.
Even at preferred rates, it's still considerably more expensive to get whole
life insurance in your 60s than it is when you are in your 30s. But Hungelmann
says you will have saved all of money you didn't spend on higher whole life
premiums over the past 30 years.
