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Money Matters: How much term life insurance should you buy?

July 13, 2010 at 2:13 a.m.


Term life insurance rates are at historic lows. Is it the time to buy?

A term policy has a set coverage period - anywhere from one to 30 years. When it reaches the end of that term, the policyholder decides to renew it or not. Term policies provide no cash buildup like whole or universal life insurance - it only provides a death benefit if the insured dies while the policy is in effect. Because term doesn't provide an investment component (the cash value), term is generally much cheaper to buy than whole or universal life.

There is debate whether to buy term or whole life. Some argue whole life is poor because you might get a better return from other investments. Yet there are good purposes for these investment-feature policies - such as part of an estate-planning strategy.

First, decide if you need insurance. People without dependents generally don't, while people with spouses and families do. The primary point of life insurance is to replace income if a breadwinner dies.

Questions you should ask when buying insurance:

How much income would your spouse and children need to replace your income over a period of years based on your current age?

Will your spouse or guardian need to provide childcare support?

Is there a mortgage to pay off?

Are there substantial short-term debts to pay off?

What are estimated college expenses for children and spouses, and when will those expenses start?

How much will burial expenses be?

Do you have other life insurance?

Are there anticipated expenses for caregiving for elderly relatives or children or family members with special needs?

Do you anticipate substantial estate taxes when you die?

Do you have assets that can be liquidated sensibly or will bring in income?

Online life insurance calculators can help you address questions 1-8. The last two questions require more thinking in terms of what you or your spouse has done with estate planning. Youth and health are also factors in how much insurance you can afford. Life insurers will investigate suspicious claims, so be honest about facts you report.

Many term life policies are both "renewable" and "convertible." Renewable means you can renew coverage without a medical exam. Convertible allows you to convert your term policy into an equivalent cash value policy from the same carrier during the term of the policy. The kind of coverage you choose depends on your personal needs.

It's important to work with financially healthy carriers. Insure.com provides free ratings from Standard & Poor's on various insurers. Other online sites provide ratings from A.M. Best.

Finally, don't buy insurance and forget about it. Review your insurance purchases every few years as part of your overall financial plan. Life circumstances change - incomes rise and fall and family size changes. Your insurance holdings need to reflect current needs and conditions.

Dave Sather is a Victoria Certified Financial Planner and owner of Sather Financial Group. His column, Money Matters, publishes every other Wednesday.

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