Buying Life Insurance

The most important step to take when buying life insurance is, to buy it! If you are dragging your feet, the below is the simplest path to get something in place to protect you and your loved ones.

Step 1: Do you need it?

If you're reading this, the answer is probably yes. Life insurance provides income replacement to those who depend on you if you die. You probably need life insurance if:

• You are married and your spouse depends on your income.
• You are married and your spouse depends on you to take care of the children.
• You have minor children, or adult children who depend on you
• You are wealthy and don't want to pass on your estate taxes to your heirs.

There are times you don't need insurance. If you are extremely wealthy and your family has enough assets to live on if you died, then you may not need income replacement. Also, if you are married with no minor children, and both have equal earning capacities, it may not be necessary.

Step 2: Determine how much you have.

Obviously this includes any current policies you own, but you may have life insurance and not realize it. If you are like most and your eyes glaze during your HR benefit seminars, you may have dozed during the part about group life insurance plans. Don't get too excited; if your employer offers it, it's probably only 2-3x of your annual salary so you'll likely need more. But definitely worth a look.

Step 3: Determine how much you need.

This is obviously the most complicated and intimidating part of life insurance. There are several rules of thumb floating out there, such as 10X your yearly income. This can be a good starting point, but there are major factors to consider, such as:

• If you have minor children, how long until they are able to be self sufficient? The older your children, the less you need.
• If you have no minor children, do you have enough in retirement for your spouse? Will your spouse need income replacement?
• Maybe you don't have any income but you are the primary caretaker for the children - how much would it cost for your spouse to hire a nanny or helper?
• If needed, could your spouse earn more to help replace the lost income?
• When determining how much you need, subtract assets and add liabilities

As you can see, determining the amount is both an art and a science. Bankrate has an easy to use, detailed life insurance calculator that analyzes multiple factors to provide an estimate of how much you need.  Again, use this as a starting point; there is no right or wrong answer. Buy what you can afford, and what makes you feel comfortable knowing your family has some protection.  Something is better than nothing; you can always add another policy down the road if needed.

Step 3: Buy it!

Life insurance is a complex product and there are multiple types you can buy. In broad strokes, it is broken down into term and whole. Three major differentiators:

• Length of insurance: Term insurance is temporary; you buy it for a certain amount of years. If you die after the term, you don't receive the death benefit. Whole life insurance is permanent, you receive the death benefit whenever you die.
• Cash accumulation: You accumulate a cash value with whole insurance, but not with term.
• Cost: The cost of term insurance is significantly less than whole insurance. Significantly. Some of the extra premium of whole life goes into the cash accumulation; but high commissions and fees eat up a large portion of those premiums.

Most fee only financial planners recommend term insurance. Whole life insurance is too expensive for most, and the commissions and fees make it less than appealing. Plus, people typically only need income replacement for a finite period of time, like until your child graduates from college.  For example, I have young children so I purchased 20 year term insurance. This should protect my kids until they are out of college and (hopefully!) self sufficient. If you like the cash accumulation benefit of whole life, buy term and invest the difference in what you would pay in premiums. One exception when whole insurance may be a better choice is for the wealthy who worry about estate taxes upon death.