|
|
|
|
|
By Allison Bisbey Colter
Although most other insurance is a cruel calculus of paying to fix a car or replace items lost in a fire, life insurance is a more intimate choice. “Life insurance is an act of love,” says Jack Hungelmann, a insurance agent and the author of "Insurance for Dummies."
As a broad guideline, if there is anyone who depends on you for financial support -- a spouse and children, elderly parents or a disabled relative -- consider enough life insurance coverage to replace your salary and any other kinds of income, such as how much your employer pays for your health insurance, or matching funds for a 401 (k).
Other factors that go into how much life insurance coverage to buy:
Even if you are childless and your spouse or life partner is employed, you might want to buy life insurance to pay off the mortgage on your home, if it takes two incomes to make the payments. 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.
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 in 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,” Hungelmann says.
Types of Life Insurance
There are two basic types of life insurance. Term insurance pays only if a death occurs during the life of the policy, typically between 1 and 30 years. The premium and the size of the payout generally remain level throughout this period.
Hungelmann says this is the best product for most people. Most choose a term that is long enough to cover you until your youngest child finishes colleges and they can support themselves. In most cases, you won’t have reached an advanced age and will remain relatively healthy before the term is up; this keeps the cost down, because fewer people collect.
The other type is whole life insurance, also known as permanent insurance. It is much more expensive, but pays the same death benefit whenever you die –- no matter your age. In order to keep the premiums level over the life of the policy, insurance companies set the rates high enough so the money they collect in the early years offsets the increased risk when you're older.
The difference between the premium you pay in the early years and the actual cost to the insurance company of insuring you is called a “cash value.” It is set aside in a savings account; your options for investing 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 generally 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.
Allison Bisbey Colter is a freelance writer in New Jersey whose work has appeared in The Wall Street Journal and American Banker. She is a former editor at TheStreet.com and a former reporter for Dow Jones Newswires.
|
|
|
|
|
|
|
|
|