April 2007
Life insurance: How to buy it
A new baby should be cause for celebrating life, not for contemplating your own demise. But there's one more thing you have
to think about, just in case. That's making sure you have life insurance--and enough of it.
The basic job of life insurance is to provide money for your loved ones if you're not around to do it yourself. Both you and your spouse should have policies, even if one of you doesn't work outside the home. That's because the "nonworking" spouse performs services that you'd probably have to pay someone else to do if she or he were no longer there.
That leaves three major decisions to be made:
Whole life, also known as cash value, is sometimes called "permanent" insurance, especially by life insurance agents, who think that sounds a lot more solid. It is permanent in the sense that it can remain in effect for your entire lifetime (hence "whole life"), as long as you keep paying the premiums. However, it is considerably more costly than term insurance, both because it has a savings component (that's the "cash value") and because insurance agents tend to make greater commissions for selling it.
For example, a $300,000 term insurance policy for a 35-year-old nonsmoking male from one well-known insurance company would run between $267 and $474 a year, while a similar cash-value policy from the same company would cost from $3,647 to $4,280 a year. The annual premiums on the term policy used in this example would remain the same for the first 20 years, after which they would be subject to an increase, and probably a substantial one given that the policyholder would by then be 20 years older. In the case of the whole-life policy, premiums would remain unchanged until the policyholder reached age 100. While that predictability may appear to be a plus for a whole-life policy, it is a very costly plus. It could be comforting to have life insurance at age 85 or 90, but the time you most need it is when your kids are young and depend on your financial support.
Because you can buy far more coverage, dollar for dollar, with a term policy, Consumer Reports has long recommended it over cash- value insurance for most people. That's especially important for parents with young children, who may need a great deal of insurance and whose budgets are already being squeezed from many other directions.
Which brings us to the second question:
How much? With a new baby in the house and all the financial demands that go along with it, you don't want to buy more insurance than you need; at the same time, you don't want to risk leaving your family with less than they need should something happen to you.
You've probably heard rules of thumb about how much life insurance is the right amount. Some, for example, suggest you multiply your salary by this number or that. Those rules are better than nothing, but not much better. Our report on How much life insurance do you need can help you get a closer estimate.
When you buy life insurance, your first goal should be to fill the gap between your family's expenses in future years and how much money they're likely to have available to meet those expenses. That means you also need to consider your other sources of income and any assets you have (such as stocks or rent-producing real estate) that may generate more income. If you're fortunate enough to have a substantial amount of money in mutual funds, say, you probably need less life insurance than you otherwise would.
Where to buy? When you're buying any type of insurance, look for a company that's likely to be around if and when you need to file a claim. While state-run guaranty associations are supposed to step in to protect policyholders if an insurer becomes insolvent, they may cover you only up to a certain limit. Besides, the last thing you want to leave your grieving heirs is another hassle.
Several ratings organizations regularly assess the financial health of life insurers. The best known are A.M. Best, Fitch, Moody's, Standard & Poor's, and Weiss. You can find their publications in many libraries, and some of their information is available online. Since some of these organizations are softer graders than others, you'd do well to compare several different ratings for any insurance company that you're considering.
All else being equal, buy by cost. You can obtain cost comparisons through an independent insurance agent (the kind who sells more than one brand of policy) or via the Web. While Consumer Reports hasn't evaluated insurance-oriented Web sites and can't vouch for their thoroughness, a few of the well-known ones are Accuquote.com, InsWeb.com, and Insure.com. You may also have access to relatively low-cost life insurance through organizations you already have a financial relationship with, such as TIAA-CREF if you work in the nonprofit sector, USAA if you're a retired military officer or family member of one.
The basic job of life insurance is to provide money for your loved ones if you're not around to do it yourself. Both you and your spouse should have policies, even if one of you doesn't work outside the home. That's because the "nonworking" spouse performs services that you'd probably have to pay someone else to do if she or he were no longer there.
That leaves three major decisions to be made:
- Which type of insurance do you need?
- How much do you need?
- Where do you buy it?
Whole life, also known as cash value, is sometimes called "permanent" insurance, especially by life insurance agents, who think that sounds a lot more solid. It is permanent in the sense that it can remain in effect for your entire lifetime (hence "whole life"), as long as you keep paying the premiums. However, it is considerably more costly than term insurance, both because it has a savings component (that's the "cash value") and because insurance agents tend to make greater commissions for selling it.
For example, a $300,000 term insurance policy for a 35-year-old nonsmoking male from one well-known insurance company would run between $267 and $474 a year, while a similar cash-value policy from the same company would cost from $3,647 to $4,280 a year. The annual premiums on the term policy used in this example would remain the same for the first 20 years, after which they would be subject to an increase, and probably a substantial one given that the policyholder would by then be 20 years older. In the case of the whole-life policy, premiums would remain unchanged until the policyholder reached age 100. While that predictability may appear to be a plus for a whole-life policy, it is a very costly plus. It could be comforting to have life insurance at age 85 or 90, but the time you most need it is when your kids are young and depend on your financial support.
Because you can buy far more coverage, dollar for dollar, with a term policy, Consumer Reports has long recommended it over cash- value insurance for most people. That's especially important for parents with young children, who may need a great deal of insurance and whose budgets are already being squeezed from many other directions.
Which brings us to the second question:
How much? With a new baby in the house and all the financial demands that go along with it, you don't want to buy more insurance than you need; at the same time, you don't want to risk leaving your family with less than they need should something happen to you.
You've probably heard rules of thumb about how much life insurance is the right amount. Some, for example, suggest you multiply your salary by this number or that. Those rules are better than nothing, but not much better. Our report on How much life insurance do you need can help you get a closer estimate.
When you buy life insurance, your first goal should be to fill the gap between your family's expenses in future years and how much money they're likely to have available to meet those expenses. That means you also need to consider your other sources of income and any assets you have (such as stocks or rent-producing real estate) that may generate more income. If you're fortunate enough to have a substantial amount of money in mutual funds, say, you probably need less life insurance than you otherwise would.
Where to buy? When you're buying any type of insurance, look for a company that's likely to be around if and when you need to file a claim. While state-run guaranty associations are supposed to step in to protect policyholders if an insurer becomes insolvent, they may cover you only up to a certain limit. Besides, the last thing you want to leave your grieving heirs is another hassle.
Several ratings organizations regularly assess the financial health of life insurers. The best known are A.M. Best, Fitch, Moody's, Standard & Poor's, and Weiss. You can find their publications in many libraries, and some of their information is available online. Since some of these organizations are softer graders than others, you'd do well to compare several different ratings for any insurance company that you're considering.
All else being equal, buy by cost. You can obtain cost comparisons through an independent insurance agent (the kind who sells more than one brand of policy) or via the Web. While Consumer Reports hasn't evaluated insurance-oriented Web sites and can't vouch for their thoroughness, a few of the well-known ones are Accuquote.com, InsWeb.com, and Insure.com. You may also have access to relatively low-cost life insurance through organizations you already have a financial relationship with, such as TIAA-CREF if you work in the nonprofit sector, USAA if you're a retired military officer or family member of one.
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