Financial Skinny: Life Insurance

Life insurance may seem like a throwaway expense until you need it.  Recent reports find that too many Americans die without adequate coverage, often leaving behind families to sort through a financial mess.

According to the Life Insurance and Market Research Association, 56 % of U.S. households don’t own an individual life insurance policy – nearly a third of those surveyed have no coverage at all. Laura Adams, senior insurance analyst at says the investment in life insurance is best made once you’ve started a family, or have any dependents. “No one wants to think about his or her own death,” she says, “But remember that it’s not about you. It’s for your family.”

I spoke with Adams recently to discuss life insurance options, how to know which is right for you and getting the best rates.

Term vs. Permanent Life Insurance

“Life insurance is a pretty broad product,” says Adams. “Most people don’t know where to start in making a decision between what are called “term” and “permanent” life insurance. Term insurance is just that, she says. With it, a consumer buys into a policy to be covered over a certain period of time (usually one to 20 years.) You pick the payout and a beneficiary, make monthly payments and, in the event of your demise, your family is compensated. If you outlive the term of your policy, you can always renew – usually at a slightly higher rate.

Permanent or “whole life” insurance also pays out once you’re gone but operates a little differently. For one, it covers you over the remainder of your life.  As such, perm premiums tend to be more expensive (five to 10 times more.)

Adams says that the average consumer will only need term insurance but those with the need for a little added security should consider a permanent policy. Say, for example, you have teenage children. You’d probably want to be certain they’d have support up until their early 20’s, until they can become financially independent. In that case, a 10-20 year policy might be best. That changes a bit if you have a child with a disability and a need for lifelong care. For that family, a policy that covers you no matter when you die would be the best buy.

Picking a Policy

Adams says, when picking a provider, get a quote from a company that you really trust. “It’s a long-term investment so be sure to pick a company with a good reputation that you feel confident will be open down the road,” she says. “Compare rates but, because policies will vary based on terms, be careful when making an apples-to-apples comparison.” Always review the deductible, length of the policy and coverage.

Determining Coverage

Lots of things go into how much coverage each family needs, but overall, Adams says, you should factor in how much you’d need to replace your income. Also consider the cost of paying off your mortgage, debts, your funeral – which can be up to $20,000 – and other expenses like putting your kids through school.

Getting the Best Deal

“The key to securing the best possible rate is to start early,” says Adams. “Many young people don’t have life insurance but, when you’re super young, it’s really cheap. Buy it while you’re young and healthy and stretch it out for a long as possible.” She says you can get the biggest bang for your buck by starting with a term policy at a low rate so when it comes time to renew the policy, the increase will be minimal.  As always, shop around between companies to compare deals.

Get Your Premium Back

A lot of people don’t know this but there’s a third option along with term and permanent life insurance. It’s called a “return of premium” policy. Adams says, it’s a type of term policy where, once you’ve outlived it, the premium you’ve paid over the years is returned to you. “Of course the premiums are higher,” says Adams, “but it’s a good option for someone that’s leery of life insurance. They’ll have the peace of mind that they could get it all back.”

Photo Courtesy, mohamad_oops.

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