LIFE INSURANCE DOs AND DON'Ts
Brooke Stephens, financial advisor and author of LIFE HAPPENS ONE DAY AT A TIME, joined THAT MONEY SHOW host Betsy Karetnick for an explanation of who needs life insurance, what kind they should buy, and how much they require.
Who Needs It
Anyone with a family to support, debts, responsibilities, a mortgage, or children -- anyone who would suffer if your income disappeared -- should consider buying life insurance. Those who are young, single, and fairly debt-free probably don't need to worry about life insurance just yet.
Kinds of Life Insurance
There are two basic types of life insurance, though each may be referred to by several names, and many insurance companies offer variants of each plan. Be sure to ask questions of an insurance salesperson to be sure the plan you're buying meets your needs.
- Term insurance - This is the easiest and least expensive type of policy to purchase, and has been designed to serve one purpose: to protect your dependents if you die. It is also the least expensive type of insurance, and if your cash flow is scarce, this type of policy is for you. The only problem, though, is that term life insurance gets more expensive as you get older. If you do opt for this type of policy, try to find one that keeps the premiums as low as possible for the first 20 years. Pay attention to the fine print, too, because term insurance policies have a fixed life span, and when the time is up, your policy is no longer in effect.
- Whole life - This type of plan costs more because it combines the protection offered by term insurance with a savings aspect. A portion of each premium you pay is invested on your behalf. In many cases, you can buy additional insurance with the built-up cash value if you want to. This plan is in effect for your entire life. In later years, you can borrow from the policy, use it to supplement your retirement, or draw on it to pay for a child's college education.
If you do purchase term insurance, most of the policies will allow you to convert to a cash-value policy sometime in the future. Find an insurance agent you trust and make sure you get everything explained in ways that you understand.
How Much Do You Need?
The rule of thumb is that you should purchase insurance valued at five to eight times your salary to replace your potential lost income and protect your family. But this determination should be based on your needs and the kinds of financial plans you may already have in place. Consulting with your financial planner will help you determine how much life insurance to buy. There are also a number of good books on the market right now.
Common Mistakes to Avoid
- Don't buy several small insurance policies. Get one stable policy, and increase its value as your family expands, or your financial requirements grow.
- Smokers will pay more for life insurance. Remember, if you are applying for more than $100,000 in insurance, your health insurance records may be examined.
- Don't fail to insure the woman of the house. If she dies, her contributions to the home will possibly have to be made up for by hiring daycare, housekeeping, and other services, not to mention the loss of her potential employment income.
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