Deciding how much
The purpose of the payout is to replace what your income would have provided. The quick rule is ten to twelve times your annual income. A more careful figure adds up your debts, the mortgage balance, the income your family would need multiplied by the years they would need it, and the cost of educating your children, then subtracts savings and any coverage you already hold. A parent who stays home with children needs coverage too, because replacing that work costs real money.
Choosing the term
Buy a term that ends when the need ends. If your youngest child is two, a twenty-year term carries the family through college. Premiums are level for the whole term and are set mostly by your age and health on the day you apply, so a healthy thirty-year-old can often buy $500,000 of twenty-year coverage for less than thirty dollars a month. The same policy bought at forty-five costs several times as much, and a diagnosis in the meantime can make it unavailable at any price.
Term and permanent, compared
Permanent insurance, sold as whole life or universal life, combines a death benefit with a savings component called cash value, and it lasts for life. For the same death benefit it commonly costs five to fifteen times as much as term, the early premiums go largely to commissions, and the cash value grows slowly. For nearly everyone the better course is to buy term and invest the difference in retirement accounts. Permanent coverage has legitimate uses, such as providing for a dependent with a lifelong disability, and those call for a fee-only adviser who does not sell policies.
Applying and keeping it in order
- Expect a health questionnaire and often a brief medical exam at no charge, and answer everything truthfully, since a misstatement can void a claim.
- Name a primary and a contingent beneficiary, and update them after marriage, divorce or a birth, because the beneficiary form overrides your will.
- Avoid naming a minor child directly, since insurers will not pay a child, and name a trust or an adult custodian.
The policy from work
Employer group life insurance, usually one or two times salary, is often free and worth accepting. It is rarely enough for a family, and it generally ends when the job does.
Tip Tell your beneficiaries that the policy exists and where the paperwork is kept. Insurers pay the claims that are filed, and a policy nobody knows about can sit unclaimed for years.
