QuickTips: Life Insurance

Determine how much you need. One rule of thumb is that you need life insurance coverage equal to five to seven times your annual take-home pay. But your needs may be more or less. So take some time to consider how much your family would need for expenses if you died prematurely.

Take into account your family’s needs immediately after death, during a readjustment period, and for other future expenses, such as outstanding debt, college costs and retirement. From there, take into consideration how much money you have now, and the amount that may become available to your dependents, such as Social Security survivors benefits or pension benefits. Make some estimates with the help of the calculators in this workbook, or contact your insurance representative.

If you’re part of a couple, do a separate calculation for each of you. And if one of you stays home to care for your children, evaluate whether you need life insurance to pay for childcare and household services that would have to be replaced in the event of death.

Pick the best policy for your needs. Once you determine how much life insurance you need, your options are between a term or a cash value policy, or a combination of these two types.

Term life insurance provides protection for a specified period of time and pays a benefit only if you die during the term. The price of term insurance increases as you get older, but this may still be an affordable option if your insurance needs decrease as you age, or disappear altogether as your children go out on their own and as your savings and investments grow into a satisfactory nest egg.

According to the American Council on Life Insurance, term insurance generally offers the largest insurance protection for your premium dollar, so you can buy higher levels of coverage at a younger age, when you’re likely to have young children and therefore need the most protection.

You can renew most term policies, up to a certain age, without having to provide evidence of insurability. You may also be able to convert many term insurance policies to a cash value policy during a specified conversion period, regardless of your physical condition.

There are two basic types of term insurance:

• Annual renewable term (ART) policies have premiums that increase each year as you age.

• Level-term premium policies have premiums that are guaranteed to remain the same for a specified period, such as five, ten, 15, or 20 years. Level-term policies sometimes have reentry provisions. Under these provisions, at the end of the initial level-premium period, you may need to pass a physical exam to continue coverage, and premiums may increase.

Since cash value policies are designed and priced to be kept for the long term, if you surrender a policy in its early years, there may be little or no cash value. The American Council of Life Insurance recommends that before you buy a cash value policy, carefully consider whether you can commit to the premiums over the long term, and whether you can afford to buy enough protection for your needs at the required premium levels. Similarly, the Consumer Federation of America advises consumers to plan to hold cash value policies for at least 15 to 20 years.

Make informed decisions. Before purchasing any life insurance policy, make sure you fully understand its terms. Ask your insurance company, agent, or state insurance department for information on the company's financial ratings from A.M. Best, Standard & Poor’s, Moody’s, and Weiss. Also ask for a copy of the Life Insurance Buyer’s Guide, which most states require companies provide you. Most importantly, read the policy itself, and ask for complete explanations of policy illustrations, since some figures are guaranteed, and some are not.

Get all the facts before you replace a policy. Before you replace or borrow against an existing cash value life insurance policy to buy a new one, contact your original insurance company or representative - surrendering one policy to buy another could prove very costly. According to the National Association of Insurance Commissioners (NAIC), that’s because you may have to pay the insurance company’s costs of selling and issuing a policy all over again. Furthermore, you may have valuable rights and benefits in your current policy that you may not have in a new one, and a new policy may not pay benefits for some causes of death covered in your current policy. The NAIC also recommends that you ask your insurer for an updated policy illustration to see how your policy has performed, and what you might expect in the future.

Keep your policy in line with your needs. Review your policy every few years to check if you’re adequately covered. And do an immediate review if you’re in a new relationship, had a baby, or changed jobs. Also check the beneficiaries on your policy to make sure they reflect your current wishes.