Sunday, 6 July 2014
Tips when considering Life Insurance
Few personal milestones compel someone to buy life insurance coverage like becoming a parent.
In the event of an untimely death, life insurance can serve as a financial safety net to ensure there’s money available to pay for everything from medical bills to a home mortgage and future college education costs.
Many Americans have taken steps to line up such a financial cushion.
At the end of 2012, 146.2 million individual life insurance policies were in effect, with coverage totaling $11.2 trillion, according to the American Council of Life Insurers.
Yet the distribution model has changed during the past few decades, and fewer Americans are relying on local financial advisers in their community to look at their overall financial situation and recommend a life insurance strategy, said Brian Bulakites, national sales manager for life insurance for Henrico County-based insurance company Genworth Financial Inc.
The Internet has enabled consumers to shop more widely for insurance, but it might also cost them the face-to-face advice that can be helpful, he said.
“The biggest thing we see in our industry today is that people don’t have advisers,” he said. “You want to find an adviser that you can build a relationship with — somebody that you can trust.”
Here are five tips for those looking to buy life insurance:
Learn insurance options
The overarching goal for new parents in buying life insurance is to provide financial security in case of the death of one or both parents.
“The first reason is for income replacement if one of the wage earners dies prematurely,” said E.G. Miller, an associate professor and executive director of the Risk and Insurance Studies Center at Virginia Commonwealth University. “That means you need to determine how much income needs to be replaced.”
“In doing that, you would also factor in that there are some survivorship benefits for children and spouses in Social Security, even for people that are relatively young,” he said. “That is a base to build on, but it is not going to replace someone’s income entirely.”
However, life insurance policies can vary widely and provide financial benefits besides a death benefit.
“There are flexible products these days,” said Bulakites, such as indexed universal life insurance, which enables the policyholder not only to have a death benefit but also to accumulate cash for use as a supplement to retirement income, to finance a child’s education or for long-term care needs.
Life insurance policies generally fall under two categories: Term insurance and permanent insurance, which is often referred to as whole life or universal insurance.
With term insurance you pay a premium for a set period, commonly 10 or 20 years, and your policy entitles you to a specific amount of money. Unless the policyholder dies, triggering a payout, any premiums paid are lost once the policy term ends.
In contrast, whole life insurance policies cover insured individuals as long as they live. These policies also function as savings vehicles. A portion of the premiums paid for the policy are invested to provide a pool of money the policyholder can access, tax free, while he or she is still alive.
Such policies are generally more expensive than term life insurance, however.
Andrew Porter, a certified public accountant in California, advises clients who are new parents to avoid whole life insurance.
“The cheapest form of insurance, generally speaking, for healthy, young adults is term (policies),” Porter said.
However, Bulakites said he would not necessarily steer younger people away from permanent insurance and toward term. For some, permanent insurance might make more sense if their budget can absorb it.
Set coverage priorities
Generally, an insurance agent will help you determine an appropriate coverage amount for the policy by examining some of the key costs your family will have in years to come, such as the cost of child care, education and the mortgage.
In determining how much to pay for life insurance and the benefit, “you have to take into consideration what your other goals are,” Bulakites said. For example, “do you have an education fund for your kids?”
Another approach is to figure out how much income you’re expected to earn over your lifetime.
Although it might be tempting to think of life insurance in terms of a dollar amount, it makes more financial sense to tie that amount to a goal, such as paying off a mortgage or college tuition, Porter said.
“If you’re going to buy insurance, you want to have a specific use for each policy,” he said. Otherwise, “it opens the way for insurance agents to oversell insurance that you may or may not need.”
Life Happens, a nonprofit organization financed by insurance and financial companies, has an online worksheet to estimate your insurance needs before you meet with an agent: www.lifehappens.org/insurance-overview/life-insurance/calculate-your-needs.
Buy a policy early
The cost of life insurance doesn’t hinge on your credit rating, savings or assets. It’s determined by your age and the results of a medical evaluation that’s required every time you seek coverage.
If you’re a couple in your 20s and healthy, you’ll pay less than when you are in your 30s and 40s.
“If you can qualify now, it’s better to do it, versus waiting and something could change in your medical situation and you may end up not qualifying,” said Craig DeSanto, head of life insurance and long-term care at New York Life. “And the younger you buy, the cheaper it is.”
A 20-year-old man who is healthy and doesn’t smoke could be charged, on average, $32.53 a month for $500,000 in coverage on a 20-year term life insurance policy, according to an estimate by insurance quote portal TrustedChoice.com.
By comparison, a 50-year-old with the same health characteristics would be charged $111.38 per month for the same coverage.
Insure both parents
It’s common for both parents to work and contribute to household expenses and the costs of caring for their children.
That’s one reason experts recommend both spouses have life insurance, particularly if they both pitch in to pay the mortgage.
But even in cases in which one parent quits work to care for a young child, that parent should be insured.
“There is (a) common misconception that a spouse who is not working does not need as much coverage as their working spouse,” Bulakites said. “I would propose that they need the same amount of coverage and maybe even more.”
Bulakites said his wife maintained her life insurance when she decided to stay at home with their children.
“I travel a lot for my job,” he said. “If something happened to my wife, who would be home with the kids? If I don’t have an occupation that allows me to do that … I would need to hire someone.”