Understanding and Evaluating Life Insurance

Life insurance is really very simple. If you die, it pays off. Its purpose is also simple; it should protect those that rely on you. It should not be viewed as an investment. It is easy to get confused about this emotional issue. But really there are only three questions you need to answer.

Do you need life insurance?

Life insurance should provide financial protection for your loved ones in case you die. If you have no spouse or children, life insurance may be unnecessary. If you are married and your spouse can handle living expenses without you, it may be unnecessary. However, if you have loved ones that need the financial support you provide and will provide in the future, you should consider life insurance to make sure they will be adequately protected and cared for.

If life insurance is needed, how much?

The answer to this question is not always simple. The basic rule is that life insurance proceeds should allow your loved ones to have the same financial lifestyle they would have had if you were still living.

One rule of thumb is that you should have a policy that would pay six to eight times your pretax income if you die. But, many find they need more than that. If you have young children and want them to be able to afford college educations, you may want more. If you are older and already have accumulated substantial wealth, you may want less and see life insurance as part of a total estate plan.

A more detailed determination of the amount of life insurance you need should take into account the following items:

• Your family's cost of living
• Income from earnings of the surviving spouse
• Benefits from Social Security
• Investment or income
• Life expectancies
• Special needs for college, etc.

There are many books and resources available at libraries, on the Internet or from financial advisors that can help you make a more accurate estimate. It is probably to err on the high side rather than leaving your family under protected.

What type of policy is best for you?

There are two basic types of life insurance policies - term and cash value whole life. Their costs are dramatically different.

Comparing annual premiums for $100,000 of coverage
Age	Term	Cash value whole life
30	$136	$875
40	$163	$1391
50	$320	$3211
60	$610	$4717

Term insurance

The most basic form is called term life insurance. Term life insurance is pure protection. Its only purpose is to pay your beneficiary if you die. It is generally much cheaper, especially at younger ages. But the cost of term insurance goes up as you get older. Term policies provide protection for a specific number of years. When that term runs out, you will need to apply for another policy. That is why it makes sense to get as long as term as possible.

Cash value whole life insurance

Most insurance agents urge their customers to buy the more expensive cash value type of life insurance. These policies provide death benefits and also enable the policyholder to build up a "cash value" that acts as a savings account. The earnings on this "savings" account is tax-deferred and you can usually borrow against it if you need money. These policies are also generally permanent. In other words, once you buy them and continue to make the premiums they remain in existence. Many of them also allow you to continue to have protection after paying for a number of years.

The real issue with cash value policies is that they are expensive. Usually there is a large commission paid to the agent and the earnings rate on the "savings" account portion is usually relatively low. You may want to do a calculation that compares the two. Assume you can invest the difference between the two premiums and compare what that grows to with the build up of the "savings" account portion of the cash value policy.

Another issue to consider

There may be sources of life insurance available that are cheaper than what you would find shopping on your own. Many employers offer group term insurance as part of their employee benefit program. There are also many organizations that provide special group life insurance programs for their members. Professional organizations, like accountants, attorneys and medical professions have programs specifically tailored for their members. They are often able to negotiate very favorable rates. You should check out these types of sources.