Just the facts on life insurance
Most kinds of insurance cover you for something that might
or might not happen. With life insurance, you're insured against something that
is certain to happen -- your death.
Death is not a pleasant event to ponder. Maybe that's why life
insurance seems to be surrounded by euphemism and unexamined rules of thumb.
For instance, it's called life insurance, but it's really death insurance. Can
you imagine trying to sell "death insurance?" Life insurance salespeople
have a tough job as it is.
As far as unexamined rules of thumb, the most popular is the one
that says your guaranteed life-insurance benefit should equal four times your
annual income. Or is it five times? Or 10 times? It's not a useful guideline
if you can't remember it and people disagree on the number.
Who needs it?
The first question to ask about life insurance is whether you need it.
People with dependents are the most likely customers for life insurance -- that
is, people with school-age children, nonworking spouses or parents who can't
take care of themselves. A favorite charity could be a dependent.
People without dependent children, those who have accumulated
enough wealth for a surviving spouse to live on, and single people might not
need life insurance
After deciding whether to get life insurance, the next question is what
The most basic type, and the easiest to understand, is term insurance.
For a specific period -- it could be one or two years or 10 or
more -- you pay a fixed premium annually. If you die during that period, the
beneficiary collects a previously agreed-upon amount. If you don't die during
the term, elves in the insurance company's headquarters chuckle maniacally as
they play in a wading pool filled with the money you sent in all those years.
OK, OK, so there are no elves or wading pools filled with currency.
With term insurance, if you're still alive after the term ends, your coverage
vanishes and you have nothing to show for your money except the peace of mind
you had knowing that your loved ones would be taken care off in the event of
If you're not rich, term insurance tends to be the best deal because
you get the most coverage for the least amount of premium. Term coverage allows
you to separate the money you spend for life insurance from the money you spend
for retirement savings and investments. You can take out a term policy for as
long as you need it -- for example, until your youngest child graduates from
college -- and then terminate the coverage.
Permament insurance: Whole, universal, variable
People who are wealthy enough to need to do estate planning, or who want
to be forced to save and invest because they don't have self discipline, often
get permanent life insurance. There are three basic types: whole life, universal
life and variable life.
Whole life is like term insurance in that you have set premiums
for a set benefit, but the policy doesn't have an ending date. You pay the premium
for the rest of your life unless you cash in and receive the cash value as a
lump sum. The cash value is different from the face amount.
With universal life, the insurer separates the death benefit from
the investment portion of the premiums. The investments pay for the death benefit.
No matter how well or poorly your investments do, you are guaranteed a minimum
With variable life, the amount of the death benefit varies with
how well the investment portion of the policy does.
Permanent life policies can be complex. Don't buy such a policy
if you don't understand it. If the seller explains it to your satisfaction and
it meets your needs, then by all means get permanent life insurance.
The next question is how much insurance to buy. That's a toughie.
The aforementioned rules of thumb dictate that you buy coverage equal to some
multiple of your annual income. The experts say it's much more complicated than
that. You have to look at your survivors' financial needs and their potential
earnings vs. your savings and investments, potential Social Security benefits,
and your job's insurance payout, if any. Your life insurance fills the gap.
Health and disability insurance
Somewhat related to life insurance (because
it relates to your body) are health and disability insurance.
A story that describes how
married couples can maximize their health insurance benefits advises you
to compare insurance plans from head to toe if both spouses have jobs that provide
health benefits. It's not always a matter of dollars and cents. Sometimes you
might be willing to pay more to come under your spouse's coverage because you
prefer the doctors who are available under the plan.
Bankrate.com also has looked at health
insurance options for the unemployed. If you want a lucid explanation of
COBRA, check out the story.
One Bankrate.com story supplies 12
questions to ask about long-term care insurance. Among the questions: Why
buy it? What happens if I get sick and I don't have this type of coverage? At
what age should I buy it? How much does it cost?
A story about long-term
disability insurance points out that this type of health coverage protects
your ability to earn an income. It notes that your chance of being disabled
at age 40 is much higher than your chance of dying.
-- Posted: Sept. 23, 2003