Life Insurance Coverage

When you buy life insurance, you want a policy which fits your needs without costing too much. Your first step is to decide how much you need, how much you can afford to pay and the kind of policy you want. Then, find out what various companies charge for that kind of policy. A good life insurance agent or company will be able and willing to help you with each of these shopping steps.

If you are going to make a good choice when you buy life insurance, you need to understand which kinds are available. If one kind does not seem to fit your needs, ask about the other kinds. If you feel that you need more information than is given here, you may want to check with a life insurance agent or company or books on life insurance in your public library.

CHOOSING THE AMOUNT

How Much is Enough? Take 5 minutes to fill out this needs analysis calculator.

One way to decide how much life insurance you need is to figure how much cash and income your dependents would need if you were to die. You should think of life insurance as a source of cash needed for expenses of final illnesses, paying taxes, mortgages or other debts. It can also provide income for your family's living expenses, educational costs and other future expenses. Your new policy should come as close as you can afford to making up the difference between (1) what your dependents would have if you were to die now, and (2) what they would actually need.

The first decision you must make when buying a life insurance policy is choosing a policy whose benefits and premiums most closely meet your needs and ability to pay. Next, find a policy which is also a relatively good buy. If you compare Surrender Cost Indexes and Net Payment Cost Indexes of similar competing policies, your chances of finding a relatively good buy will be better than if you do not shop. REMEMBER, LOOK FOR POLICIES WITH LOWER COST INDEX NUMBERS. A good life insurance agent can help you to choose the amount of life insurance and kind of policy you want and will give you cost indexes so that you can make cost comparisons of similar policies.

Don't buy life insurance unless you intend to stick with it. A policy which is a good buy when held for 20 years can be very costly if you quit during the early years of the policy. If you surrender such a policy during the first few years, you may get little or nothing back and much of your premium may have been used for company expenses.

Read your new policy carefully, and ask the agent or company for an explanation of anything you do not understand. Whatever you decide now, it is important to review your life insurance program every few years to keep up with changes in your income and responsibilities.

Some policies, including universal life policies, provide unbundled cash values. That is, the insurer subtracts, from the premium you pay, certain expense charges and a charge for the current insurance costs; the balance is accumulated, with interest, in a fund. The value of this fund at any time, less any surrender charge, is the cash value. The interest rate allowed may be comparable to rates offered by such other investment media as money market funds; this is attractive when such rates are high.

Sometimes these policies having unbundled cash values (under various trade names) also let you vary your premium payments every year, and even skip one or more payments. Insurance usually continues as long as there is enough money in the account to pay the insurance charges. If the insurer or agent claims a cost advantage for these policies, remember that life insurance costs are determined basically by the interest rate allowed on funds, by the current insurance costs (the "mortality" charge), and by the expense charges (including any applicable surrender charges). If these factors are the same for two policies, their costs should be similar, whatever the policy design.

You may also be told that a particular kind of policy has tax -usually Federal Income Tax - advantages. This may be true, but you would be well-advised to check this with your tax advisor -lawyer - or accountant - if you have one. Remember that the tax law may change at any time.

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