Talk about an unpleasant expense: Life insurance is something you pay a lot for, then never get to use. It's also likely one of the least-understood major expenses. Many people buy it when they don't need it, and many need it and don't buy it. And some don't have it and don't need it, but they allow salespeople or family members to make them feel guilty for forgoing it.
You need life insurance if those you leave behind will suffer financially from your death. This is typical when you have children, debt and a one-income household, when losing the breadwinner would be financially tragic.
When you've paid off the house, the kids are gone, the savings accounts are topped off, and your death would just be an excuse for your remaining friends to get together and have a drink, your need for life insurance is over.
Shop - search tools are a great way to make sure what you have now is still a good deal. But if you're buying your first policy, or know you're going to replace existing coverage, more due diligence is in order. Check several search sites and beat the local bushes as well.
Buy term - There are two basic classes of life insurance:
Permanent or whole life. As the name implies, these policies offer a lifetime of coverage. They also combine a savings account and life insurance contract, allowing you to tap the savings component, known as cash value, should the need arise.
Term insurance, on the other hand, has no cash value and covers you for a specific period of time, from one year to 20 or more. If you die during the term covered, your beneficiaries get a check. If not, you're out the premiums.
While permanent sounds like a no-brainer, most people should buy term. The reason is simple: Term is much cheaper. In addition, you usually need insurance when you're younger, in debt, and raising a family. As you age, pay off the mortgage, and no longer have people depending on your income, the need for insurance withers. (That's good, because the older you get, the more insurance costs.)
Be aware that many insurance agents and some financial advisers will give you the opposite advice. They believe the forced savings offered by a whole life policy is worth the extra cost. But most objective advisers will tell you to buy term and use the difference in price to save and invest on your own.
The longer the term you buy, the less it will cost per year. In other words, you're better off getting a 20-year-level premium policy than one that renews every two years. In an ideal scenario you'll pick a term that matches your need for insurance.
Don't buy more than you need - As someone who sold life insurance back in my stockbroker days, I can assure you that fear is often an integral part of the sales process. In addition, the insurance salesman makes assumptions that may not accurately reflect your financial need.
For example, many salespeople will simply say to multiply your annual salary by seven. They might also assume you want a benefit big enough so your spouse and children can live forever off the interest alone. Or that your kids plan on attending Harvard. Or that your mortgage balance isn't decreasing with every payment you make.
How much insurance you need isn't an exact science. Maybe you want to leave your survivors wealthy, or maybe you just want to leave enough to pay for your funeral. But if you leave it up to a company-sponsored calculator or salesperson, expect a big death benefit -- and a big premium to go with it.
Better idea? Figure out what your death would mean financially to your family and determine their needs, both short term (paying for your funeral) and long term (paying off the mortgage and college costs). When you've arrived at an estimate, subtract the money you have now or can expect from Social Security or work-related policies, then cover the shortfall with insurance.
Avoid guaranteed issue - Ever see a TV commercial, usually directed at older folks, offering insurance with no medical exam and insisting "you can't be turned down"? That's guaranteed-issue life insurance. It doesn't take a rocket scientist to figure the angle: The death benefit is so low, the first few years of premiums may add up to more than your beneficiaries will receive.
Avoiding a physical sounds convenient, but you'll probably get a better deal by submitting to one, even if you're not in the best of health. If you know for a fact that you're otherwise uninsurable, you may not have a choice. But if you have alternatives, explore them first.
Stay on top of it - Health issues will make your insurance more expensive, so getting healthier can mean savings. If you quit smoking, lose weight or make other life changes that lower the risk for the insurance company, don't be afraid to contact them and ask for a reconsideration. But be prepared to provide proof, such as an extensive medical history, to get a lower rate.
Health isn't the only thing that can lead to changes in your policy and premium. Have a new baby? You might need more insurance. Pay off the mortgage? You might need less. Periodically re-evaluate your coverage needs and costs.
If you need to increase your coverage, you may be able to do so less expensively by buying a rider (an addition to an existing policy) rather than taking out a new policy.
Pay annually - As with most kinds of insurance, companies often charge a little more if you pay premiums monthly rather than annually. You should also ask about discounts for allowing the company to tap your bank account and collect the premium automatically.
Don't buy it for the kids - Unless your child is contributing financially to your family, you child doesn't need life insurance.
As with the whole life-versus- term argument, this advice is not fully embraced by everyone. There are those who insist that buying a permanent policy for infants is a good idea, for three reasons:
If they should later develop a health condition that renders them uninsurable, at least they'll have some coverage. Although it's certainly more rare than with seniors, children die. They'll establish a permanent savings account.
While these are valid arguments, they're not enough to convince me or most financial advisers. A savings account for kids is a great idea, but there are lower-cost ways of going about it.
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