Time to Think about Life Insurance?
Death is one of those things we usually don’t like to talk about, at least not our own. And planning for it tends to get pushed down our long list of to-dos, below supervising homework, arranging carpools, buying groceries and maybe going to the dentist.
But how many of us have lain awake at night, worrying what would happen to our family if we, or our spouse, died?
We’re not alone. A recent study from LIMRA, an association of life insurance and financial services companies, found that just 44 percent of U.S. households have individual life insurance coverage, a 50-year low. And in households with kids under 18 at home, 40 percent said they’d immediately have trouble meeting everyday expenses if the main breadwinner died.
So if someone depends on you financially, you probably want to consider life insurance. Even if you’re a stay-at-home parent, you need to account for the value of what you do around the house, such as childcare, cooking, chauffeuring and home maintenance.
Choosing a Policy
What kind of life insurance do you need? There are two types: term and cash value, also called permanent.
The majority of policies sold today are term insurance, which covers you for a specific period of time, says Cliff Dompier, brokerage manager with Carrol & Associates in Bellevue. The firm does business with 350 insurance agents, whom Dompier coaches.
About 85 to 90 percent of the policies they write are term policies, which are cheaper than cash value policies.
“When you buy term insurance, you’re making a bet with the insurance companies,” he says. “The bet is, you’re betting you’re going to die, and they’re betting you’re going to live.”
Only about 5 percent of term policies ever pay out, he says, because they typically end before the insured person dies.
The goal with term insurance is to cover expenses for your family if you die while they might still need your support; for example, goals might be to provide coverage until the kids leave home or finish college. When the term expires, your coverage ends. You can’t cash in the policy.
Cash value, or permanent, insurance policies pay a death benefit whenever you die. They also have a cash value, so you can surrender them for cash, or take a loan against the policy, for example. Whole life, universal life and variable life are all types of cash value insurance.
They’re not nearly as popular as in the past, when people considered using them to borrow a house down payment or invest for college; now, there are so many more investment options. Plus, cash value policies cost more – Dompier estimates three or four times as much as term policies.
“People say, ‘I’d rather put my money in a mutual fund or IRA than put it in a life insurance contract,’” he says.
Regardless of which type of insurance you choose, you can attach riders for various things such as accelerated benefits, which allow early payments to terminally ill policy holders; the ability to waive your premium if you become disabled; and coverage for your children. There are also new products that allow you to specify that death benefits be paid out over time instead of all at once, if you think your spouse or children wouldn’t spend a lump sum wisely, Dompier says.
Riders to cover kids are relatively cheap. A parent could add riders for their kids at about $6 per $1,000 of coverage, Dompier says, so a $10,000 policy would cost $60 a year. And that $60 would cover policies on all your children, whether you have one or five, to pay for funeral expenses or uncovered medical bills if the unthinkable happens.
Some financial experts, though, say you don’t need this coverage because you’re obviously not counting on your children’s income (unless they happen to be child prodigies). They argue that there are better ways to invest your money.
How Much Coverage?
How much you need depends on your particular situation, and most experts suggest working with an agent, broker or financial planner.
Several websites offer online calculators to help you figure it out. They usually start by asking how much pre-tax income your family would need to keep their current lifestyle, suggesting 60 percent to 75 percent of your total income.
From there, you look at your assets, debts and expected expenses. The Life and Health Insurance Foundation for Education says final expenses such as funeral costs, uncovered medical bills and estate settlement costs can run $15,000, or 4 percent of your estate.
Some experts advise buying coverage worth seven to 10 times your annual income.
According to the American Council of Life Insurers, Washington state residents own about two million individual life insurance policies, with coverage averaging $160,000 per policyholder.
As you research your options, ask friends or family to recommend agents or insurance companies. Don’t forget to check with your employer – some businesses offer group life insurance policies for workers. And once you buy insurance, be sure to review your coverage if you have life events such as the birth of a child, a marriage or divorce, even a promotion or the purchase of a new house. All of these things can affect your lifestyle costs, so you might want to adjust your coverage.
Margaret Santjer is a freelance writer and mom.
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Trying to sort out life insurance options? Here are some places for help.
- The state Office of the Insurance Commissioner – They regulate insurance companies and have a wealth of online resources for consumers atwww.insurance.wa.gov/consumers/life_annuity/index.shtml. You can check there to make sure an agent or company is licensed to do business in Washington before you buy (there are about 450 licensed insurers). And if you have questions regarding insurance coverage, you can call the consumer hotline at 1-800-562-6900.
- The American Council of Life Insurers – Check their free consumer tips guide online at www.acli.com. Click on “Consumers” and then “Life Insurance.”
- The Life and Health Insurance Foundation for Education – LIFE is a nonprofit organization formed by seven insurance producer organizations to educate consumers. The website, www.lifehappens.org, includes several online calculators to help you determine your needs.
- The Insurance Information Institute – This nonprofit group, supported by the insurance industry, offers consumer information, as well as industry statistics, at www.iii.org.