LIFE INSURANCE BASICS   

Determining Life Insurance Needs
Life insurance is designed to replace the income of the insured person. Today, with two-income families the rule, insurance on both spouses can be important if a family’s lifestyle is to be maintained in the event of the death of either the party. Therefore, the first step in gauging your life insurance needs is to realistically assess your family’s assets, income and ongoing expenses. Then determine how the death of one spouse would impact the family’s ability to cover those expenses over the long-term. Be sure that your expense calculations include amounts sufficient to cover medical costs, federal and/or state estate taxes, funeral and burial expenses, and the fees associated with settling a will through probate court.

Families with high life insurance needs include working couples with children, single parents and business owners.

While everyone’s situation is different, some experts suggest that your total death benefits should equal at least ten times your annual income in order to maintain your family’s lifestyle. If this sounds like a lot of coverage, think again. It often isn’t. For instance, while families with two wage earners may be able to consider purchasing less life insurance protection, assuming that one of those incomes will remain intact if the other one stops, remember that you may need to compensate for many years of lost income.

What Do You Already Own?
In considering how much life insurance might be needed to make sure your family is adequately protected, you should first identify the total amount of death benefit protection already in place from a variety of sources—not only life insurance policies and annuity contracts but also Social Security and any retirement plans in which you may participate. By taking these other resources into consideration, you might find that you already have sources of income equaling four to six times your annual income.

For example, some employers include life insurance as part of their total benefits package. If you’re not sure if yours does, check your employee manual or ask your company's benefits administrator or a Human Resources representative to explain the specifics to you.

In addition, Social Security also pays death benefits to: surviving spouses or ex-spouses* age 60 or older (50 or older if disabled); surviving spouses or ex-spouses* of any age with dependent children under age 16; surviving unmarried dependent children under age 18 (or age 19 if a full-time student); and surviving dependent parents age 62 or older. The amount awarded is based on the amount of Social Security contributions you made through payroll deductions over the years. If you own an annuity, you should also count this death benefit among the resources that may be available to your dependents upon your death.

What Kind of Life Insurance Should You Buy?
Once you’ve determined your insurance needs, you’ll have to decide what kind of life insurance policy will suit your needs at the most affordable cost. There are two basic types of life insurance: term insurance and permanent, or cash value insurance.

Term insurance is the simplest and can be the least expensive form of life insurance. Its coverage is limited to a specified term (most commonly a year) and premiums can rise at each renewal—generally starting at a modest rate when you're young and advancing along with your age. With term life the policyholder is buying only death benefit protection.

Permanent insurance policies are designed and priced to be held over a long period of time. They not only offer death benefit protection but also provide for the tax-deferred accrual of a cash value. There are several types of permanent insurance policies, each with individual features, benefits and restrictions. Some of the most popular forms of permanent life insurance are described below:

Whole life policies generally require the payment of a fixed premium over the life of the insured. A portion of each premium is allocated to a cash reserve that earns a dividend or rate of interest. The entire balance in the cash reserve is paid to you when you cash in (surrender) the policy. While the rate credited to the reserve will vary over time, the reserve is guaranteed against loss of principal and accrued earnings.

Variable life policies are similar to whole life policies but allow you to choose—from a series of managed investment portfolios selected by the life insurance company—where your cash reserve will be invested and even move reserves between portfolios. These investment portfolios run the gamut from money market accounts to bond funds to aggressive equity funds, and policies differ widely on the number and type of portfolios offered. The downside of this flexibility is that the cash reserve is not guaranteed against losses and you, the policyholder, bear that investment risk. You should read the prospectus carefully before selecting any variable life insurance product.

Universal life policies are much more flexible than whole life. Policyholders may periodically increase or decrease premium payments and the amount of insurance coverage, and may also make permanent withdrawals from the cash value while the policy is still in force. Policyholders should note that withdrawals may not only reduce the death benefit payable under the policy, but may also result in significant charges in the early years of the policy.

Variable universal life goes one step further than universal life by combining the premium flexibility of universal life with the investment flexibility of variable life.

How Can You Get the Best Insurance Values?
Here are some tips on how you can save money on the insurance you need.

1. Buy a policy with non-smoker discounts, if you qualify. Over time, it can add up to a significant deduction.
2. Periodically take the time to reevaluate your needs. This can help alert you when its time to drop coverage you might not need any longer—or to buy additional insurance if the need arises.
3. By paying your premiums annually, you can avoid charges often imposed for more frequent payment. If you’re going to pay premiums semi-annually or quarterly, be sure to check with your insurance company about their surcharges. You may find it too costly to make anything other than annual premium payments.
4. Before you purchase any life insurance, consider buying it from a company that has received the highest ratings from independent rating agencies such as Standard & Poor’s, Moody’s, A.M. Best, and Duff & Phelps. Although ratings do not refer to any specific insurance products or their performance, they do represent the financial stability or claims-paying ability of an insurer.