IAM 38 years old, with a spouse and two children. How can I estimate how much life insurance I might need, if I were to die, to protect my family? And what type of life insurance should I buy, term or whole life?
- R.N., Chicago
To measure your life insurance needs, start with three basic questions:
How much financial support do you need to leave behind?
How much financial support would you like to leave behind?
How steep a premium can you afford to pay every year?
Your answers will identify your minimum needs, maximum wishes and the ability to pay for those needs or wishes. Realistically measuring your willingness to pay the premium is especially important.
Since cost is so critical to sustaining coverage, look to buy term life insurance. The premiums pay for coverage, and nothing more. The policies deliver benefits only when the policyholder dies. With relatively few working parts, term life policies - especially for those 45 and under - are usually the cheapest to maintain over 10- or 20-year periods.
And where should you shop for a policy?
Look for group policies through your employer or trade association if you're self-employed. Look on the Internet or at your local savings bank. Look for a life insurance agent. Or consider using a fee-only consultant - a life insurance expert who works to find low-cost policies in exchange for an hourly fee or fee-for-service rate.
If, for example, you are a nonsmoker with low blood pressure, a low blood-cholesterol reading, no heart disease and no pre-existing fatal illnesses, you'd probably fare best buying an individual policy.
If, however, you're an overweight smoker with high blood pressure, you might find that group policies provide the most affordable coverage (no physical required). But employer-offered group policies often set limits on coverage. Coverage within these limits might fall below your needs and might have to be supplemented with coverage purchased from another source.
Give yourself at least a month to shop around for the best deal, and take even more time to consider how much coverage you'll need. Some advisers recommend anywhere from seven to 10 times your annual income, adjusted for inflation. But rather than rely on a rule of thumb, sit down and ask yourself a few questions:
Should the policy replace your yearly income for however long your children are dependents? Should the policy repay your household's outstanding debts? Pay for a nonworking spouse's job training, if he or she needs it? Pay projected college expenses for your children?
There are no right or wrong answers to these questions. But there is one rule you absolutely must follow: Make sure you buy a policy with a yearly premium you are willing and able to pay.
"If the premium is so high that you'll skip paying it when money is tight, then the policy is worthless," said David Barkhausen, a fee-only life insurance consultant based in Lake Bluff, Ill.
To learn more, visit the www.consumerfed.org Web site; click on the link labeled "finance." Or, check out "Protect Yourself: Using Insurance, Security Techniques and Common Sense to Keep Yourself, Your Family and Your Things Safe," by Silver Lake Editors (www.silverlake.com). Or, do a www.google.com search using the words "life insurance needs analysis." Dozens of calculators and worksheets should appear.
Is it ever a good idea to insure a child's life?
- I.D., Orlando
No. Unless your children are Mary-Kate and Ashley Olsen, the death of a child is not likely to create a financial hardship for parents. "Focus on getting a complete family health insurance policy instead," said Robert Hunter, an actuary and consultant for the Consumer Federation of America.
Matthew Lubanko is a financial columnist for the Hartford Courant, a Tribune Publishing newspaper. E-mail him at firstname.lastname@example.org.