Everything You Need to Know About Life Insurance
Every parent needs coverage, but no one wants to think about it. Now you don't have to -- we've done the legwork to help you find the perfect policy for your family.
As a parent it's your job to consider the "what ifs." You babyproof your home, buy a car with the top safety rating, and keep the number for Poison Control on speed dial. It's the same idea with life insurance. "You buy it and then hope you never have to use it," says Debra Neiman, a certified financial planner in Arlington, Massachusetts. "But the consequences of not having it could be financially devastating."
Incredibly, a lot of parents skip this crucial protective step. In 2010, 23 percent of U.S. households with kids had no coverage, dramatically up from only 10 percent in 2004, according to LIMRA, a Windsor, Connecticut, consulting firm that specializes in insurance. If cost has kept you from buying or updating life insurance, the time to act is right now, with premiums hovering near historic lows. A healthy 35-year-old woman can lock in a $500,000 term-life policy -- meaning the coverage lasts for a fixed period, as opposed to a permanent one, which stays in effect until you die -- with a 20-year duration for about $250 per year. More reason to get it done: For most parents, your age is a huge asset. "The math is pretty simple; the younger you are, the lower your premium," says Robert Bland, chief executive of lifequotes.com, a national insurance brokerage based in Darien, Illinois. Plus, you'll rest easier knowing that your family is protected.
1. Start by figuring out how much you need.
It's a commonly quoted guideline that a life insurance policy should total seven to ten times your annual salary. But you'll need to dig deeper to determine how much money your family would need to live without you or your spouse. "Don't rely on this rule of thumb, because it can underestimate or overestimate your needs," says Steven Weisbart, Ph.D., senior vice president and chief economist for the Insurance Information Institute, a nonprofit research organization in New York. Take Ary Rosenbaum, of Oceanside, New York. Three years ago he used the ten-times formula and took out a $1 million plan, thinking it would provide a healthy cushion for his wife, Susan, and kids, Jason, 5, and Meredith, 4. Then he did the math and realized that his policy might get his kids to college but not through it. "That money has to last them for 20 years," says Rosenbaum, who recently took out a second policy to cover Jason and Meredith's higher-education expenses.
You may not need nearly that much coverage, or you may require even more. It all depends on your family's financial profile. See "How Much Coverage Do You Need?" to get a ballpark number. If you're thinking about having more kids, factor that in too. "Buying a little extra coverage now can save you a step -- and some money -- later," says Brentt Hoover, a certified financial planner with MetLife in San Diego.
2. Take stock of the coverage you have.
For couples who were savvy enough to buy insurance when they got married, it's time to reevaluate your needs as soon as you start a family. Should you opt for more coverage, it's generally simplest to add a second policy (especially if you've had the first one for at least five years). But price out both options -- it may end up being cheaper to buy a single new policy and cancel the existing one, suggests Bland. If you have insurance through work, consider it a nice perk of the job. "But it shouldn't be your only coverage," says Amy Danise, senior managing editor for insure.com, a rate-comparing site. That's because these policies are almost always temporary. Unless you have the option to convert yours into an individual plan (which tends to be very expensive), you'll be without coverage as soon as you leave the company. When Michael Buzin was laid off from his job as a manager for a national retailer in early 2010, he and his wife, Susan, both lost their employer-sponsored life policies. Although he found a new position that offered a comparable insurance benefit a few months later, the experience taught the couple from Pittsburgh a lesson. They recently applied for independent life coverage to safeguard the future of their kids, Katharine, 11, Sarah, 8, and Jacob, 6.
3. Pick the right policy for your needs.
Your top priority should be to ensure that you have ample protection for when your kids are young. That's why term life is the most popular choice among parents. These policies provide coverage ranging from five to 30 years, and their annual premiums are within the reach of most families. Although the cost rises as the policy length increases, it's a good idea to invest in a term plan that covers you until your youngest child finishes college, says David Mendels, a certified financial planner at Creative Financial Concepts, in New York City.
If your needs are for a longer time period and you can afford it, permanent insurance -- such as whole or universal life -- may be worth a closer look. These plans have two key advantages over term ones: First, they don't have an expiration date, so it's far more likely that the policy will get paid out (though they do require some care to make sure they don?t lapse). Second, they typically include a savings or an investment component that can appreciate in value over time. Whole-life premiums are much higher, though. The same 35-year-old woman mentioned above would pay around $2,000 per year for a $500,000 whole-life policy -- eight times the cost of a comparable 20-year term -- according to MetLife estimates.
Can't swing the higher premium? Many term policies have the option to convert to permanent insurance (but be sure to check details carefully). Casey and Catherine Underwood, of Shawsville, Virginia, each took out a convertible $500,000 term policy when their oldest daughter, Elli, was born. Five years and three kids later, they've added additional coverage, including $100,000 in whole-life policies, and they hope to convert additional term coverage to whole life down the road. "Our youngest child is 11 months old, so we wanted a long-term solution," says Catherine. "This option lets us slowly build cash rather than simply putting money into something that, hopefully, we'll never use."
4. Start your search.
While you don't want to delay your insurance application any longer than necessary, there are two moves you should make before applying. The first is to take better care of yourself. "If you can stand to lose a few pounds or improve your cholesterol level, now is the time to do it," says Danise. The other is to shop around. Begin by visiting a site that provides quotes from multiple carriers, such as lifequotes.com or accuquote.com. Both require you to complete a detailed, confidential questionnaire, but they also make it easy to pinpoint the best rates.
Need a bit more handholding? Choose a financial planner who sells insurance or go with an insurance agent who?s recommended by a friend, a coworker, or a family member. You can also visit lifehappens.org to search for qualified agents in your area. Before picking someone, ask to meet in person or chat for a while on the phone. You need to feel comfortable sharing your personal and financial information and confident that the broker is acting as your advocate -- not selling you more coverage than you need or can afford.
Whichever route you choose, it's essential to be truthful about everything from your blood pressure to your exercise routine. If you don't disclose your health issues, your actual premium (which isn't determined until after a medical exam) could end up being a lot higher than you were initially quoted, or you could be denied coverage altogether, notes Bland. One more thing: Don't let your hunt for a bargain come at the expense of quality. Check that the insurer has at least an A rating for financial health at insure.com. After all, you need to know the company will make good on its promise to you, so you can make good on yours to your loved ones.
Don't Forget Disability
Disability coverage ensures that you maintain some income in case injury or illness prevents you from working. Not all employers supply it, and those that do often cover only half of your salary. Look for a policy that would boost your total payout to 70 to 80 percent by taking these steps.
Check out your disability benefit at work.
See what percentage of your salary is covered, whether you can buy supplemental coverage, and whether the policy is portable or convertible when you leave.
Be prepared to wait.
You can save money by purchasing a policy that doesn't pay out until you've been disabled for, say, 90 days as opposed to 30. Just make sure you have ample emergency savings to cover the gap.
Try bundling your life disability coverage.
Some life policies offer a disability rider, which may be more affordable than í la carte coverage.
Improve your risk profile.
Disability applications tend to be scrutinized even more closely than life-insurance ones. Trading in a motorcycle for a treadmill may help you get approved -- or might even lower your rate.