Life Insurance — Life insurance isn’t so much about life as it is about death. Insurance on your life is something you will never benefit from. The insurance company will pay the death benefits to your beneficiaries. Consumers are often confused by life insurance: when to buy coverage, when to skip it, how much coverage, what type policy do I need. The Wall Street Journal recently printed the Complete Personal Finance Guidebook by Jeff D. Opdyke. Here are some of Opdyke’s suggestions on life insurance.

Do you need life insurance?

Maybe not if you are single with no dependents;

Or working couples without kids;

Or wealthy people who already have an estate large enough to provide for a spouse’s lifestyle;

Circumstances where life insurance is needed.

You have dependent children and or have a nonworking spouse. The loss of your income could affect your spouse’s ability to remain in the family home with the children and continue to provide the level of education you otherwise could afford on your salary.

You have special-needs siblings or others you support or wish to care for.

You have a mortgage remaining on your home and/or lots of credit card debt.

How much life insurance is enough?

The ideal amount of life insurance allows beneficiaries and dependents to invest the insurance payout and then draw down the account over time to maintain the standard of living that the missing income otherwise would have provided.

The Rule of Thumb is the most basic method, estimating that you need life insurance somewhere between five and 10 times your annual salary. I believe that 10 times is better due to inflation. Opdyke explains that this method is fairly simplistic in that it doesn’t require you to address any specific insurance needs you might have, such as the cost of child’s college years from now or the continuing care of a special-needs dependent.

Income Replacement takes the view that you need to essentially replace some level of income — be it an entire salary or some portion of it — over a certain number of years. If you have few financial assets and no special needs to finance, then this method is probably fine.

Financial Need takes into account various expenses your income would otherwise help afford, such as a child’s tuition; the family’s annual living expenses; your spouse’s future retirement needs; debt/mortgage payoff; and other special needs. This is my recommendation — to sit down and figure out, including inflation, a replacement figure necessary to support the family needs. This is the most detailed approach to life insurance because it requires some real thought to determine what expenses you need to cover and how much those expenses are going to cost years or decades from now. With this method, Opdyke says, you should also evaluate the liquid assets you already have in place. If you have already saved for much of your child’s expected college costs, there’s really little reason to include that in your insurance coverage.

What type of policy should you buy?

Life insurance is available in two basic forms: “term” and “cash value.” Term life is in place for a specific term – typically 10 to 30 years. You determine how much insurance coverage you need and pay a premium guaranteeing your beneficiary will receive the face value of the policy if you die during the term. Term’s biggest benefit: It’s cheap, meaning you can afford more for your money. But remember, it offers no grace period and, like car insurance, if premiums are not paid on time you lose your coverage.

With cash-value, part of your premium buys a death benefit, and part funds a cash account. Cash-value policies are designed to be held for life. Because premiums must first cover substantial costs such as the sales commission, most contracts don’t break even for years, meaning the premiums you’ve paid won’t equal the accumulated cash value you’re eligible to claim for many years. The premium is higher than for term insurance, but generally has a grace period for payments.

I believe that most NPS employees are under-insured. The most FEGLI (which is term insurance) will pay is five times your salary if you have opted for this feature. But it may not be enough. Look to other term insurance in addition to the FEGLI. Term insurance is the way to go. Just go to Google and search for term insurance. Opdyke is correct in his findings.

~ Frank Betts
Retired

Previous Columns
Winter 2005-06
Fall 2005
Summer 2005
Spring 2005
Winter 2004-05
Fall 2004
Summer 2004
Spring 2004
Winter 2003-04
Fall 2003
Summer 2003