Who Needs Life Insurance?
If you’re renting, life insurance may not be a pressing concern. However, once you own a home and have a mortgage, or if you reach the point where you'll soon become parents, you need life insurance. It protects you if your spouse were to die; the other would receive enough money from the insurance policy to maintain his or her lifestyle or cover any major debts (like a mortgage).
How Much Life Insurance Do I Need?
One way to figure out how much life insurance you need is to calculate the monthly income you’d want your beneficiary (the person who’d receive the payment -- usually your spouse) to receive, and then work backward to determine how much money would be necessary. Typically, more insurance should be purchased for the spouse with the higher wages.
Permanent vs. Term?
Permanent insurance covers you until you die…regardless of when. Premiums can run you more than $10,000 a year for a $2 million policy. The upside: There’s a cash value to the policy that grows on an income tax-deferred basis -- you may be able to tap into this to pay off a mortgage for emergency expenses.
Term insurance covers you for a certain amount of time (hence, “term”); say, 15 or 30 years (the length of a mortgage, get it?). After that, the policy is worthless. Sometimes couples opt for term insurance for the spouse who has the higher wage-earning potential. It's the most basic yet arguably the best option for couples who don't need or want major coverage.
Quick Tips
1. Consider how necessary that payout is when one of you passes away. And if $300K will do the trick, don't get a penny more.
2. If you're diligent about putting money in an IRA or a 401(k), having that payout may not merit the higher premiums of permanent insurance.
3. Buy a policy that would help pay for the largest of your debts plus an additional 10 percent.
4. Review your policy with life changes -- like a baby, real estate purchase, significant career change -- or, at the very least, every two years.
[Nestpert] Anthony Steuer, CLU, life insurance analyst and author of Questions and Answers on Life Insurance
by Janet Siroto
7/1/08
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