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How to Know If You Need Coverage

The question to ask yourself is, Would my death leave anyone in a financial bind? For Doug McLeod of Minneapolis, the answer was yes. Like many people, McLeod, 30, got serious about life insurance in preparation for the birth of his first child, locking down a $1 million policy in April. If he should meet an untimely end, he explains, “I want to let my wife stay home with my daughter and not have to uproot her life completely.”

Once you become a parent, any adult in your house earning income should have life insurance coverage that will last until your youngest kid gets through college. And in a family without a lot of money saved, a stay-at-home parent may need a small policy, to cover child care costs that would be created by that parent’s absence.

Even if you belong to the dual-income, no-kids crowd, you may need life insurance to cover large shared financial obligations such as a mortgage. For older empty-nesters, though, life insurance is often an expense you don’t need as long as your retirement nest egg is big enough to support your surviving spouse. But if that nest egg is really big at least $1 million, enough so that your assets will generate estate taxes it’s worth staying insured, because your heirs can use the proceeds, which are tax-free, to pay off those liabilities.

How to Pick the Right Kind of Insurance

Once you start shopping, brace yourself. You’ll likely hear that permanent life insurance is the solution to all your financial problems. The pitch will go like this: Yes, a permanent policy costs more than term insurance (four to 15 times as much), but over time, it builds a “cash value” you can borrow against, withdraw or use to pay future premiums.

The money grows tax-deferred, in fixed-income investments with whole life coverage, or in mutual funds with variable life

But here’s what your agent may not tell you: It’ll be a while before you see any of that cash. For the first two to 10 years, part of your premiums are paying the agent’s commission. Even after that, the average variable life policy has annual maintenance charges of more than 2% of your cash value, and many states charge taxes of 2 to 3% of your premiums. Given that, most people are better off buying term and using the money they save on premiums to invest in other tax-deferred vehicles such as IRAs, 401(k)s or Section 529 college-savings plans.

Let’s say you’re a 35-year-old Georgia man who qualifies for preferred rates, and you buy a $250,000 variable life policy from TIAA-CREF. Every year you pay $2,500 in premiums; whatever’s left after fees, commissions and the cost of your death benefit goes into an investment account. If that money earns an 8.5% net annual return, you’ll build up $97,362 in that account after 20 years.

But say you bought a $250,000 20-year term policy instead. That would cost you $225 annually from Federal Kemper Life, giving you an additional $2,275 a year to invest as you saw fit. If you earned the same 8.5% return, you’d rack up $121,687 beating that permanent-life account by 25%.

So why do agents push permanent life so hard? Simple: Higher premiums mean higher commissions.

That said, permanent life can make sense for select groups of people. Peter Katt, a life-insurance adviser in Mattawan, Mich., recommends it as a savings vehicle for people who consistently have income left over after maxing out their other tax-deferred accounts. But Katt urges even those clients to cover their baseline insurance needs the money to protect their families with cheaper term life. Permanent life is also often a better option for older people because term’s price advantage fades as you reach your late 60s.

Katt’s advice to those customers who do buy a permanent policy: “Overfund” it, making big payments up front so you start amassing earnings faster. Another way to do that is with a low-load policy one with low fees (less than 1% a year) and low commissions (10 to 20% of a year’s premium).

For the vast majority of families, level-premium term life is the best option. With that as your foundation, annual-renewable term can be a good supplement if your family takes on any big short-term obligations. (Maybe you’re amassing debt while earning a midcareer MBA.) The premiums on ART policies grow slightly as you age, but for periods of up to five years, they’re usually cheaper than level premium.

How to Shop for Good Rates

Term life insurance is as cheap as it’s been in two decades, thanks to increasing life expectancies and cutthroat competition. But that doesn’t mean every policy is a good deal. When we poked around for a $750,000, 20-year term policy for a healthy, nonsmoking 33-year-old New York male, we found annual premiums ranging from $403 at William Penn to $1,580 at North American Co. for Life and Health a swing of $23,450 over the policy’s life.

The Web is your best starting point. But since dozens of sites offer price quotes, which should you turn to? The answer depends on how healthy you are.

The cheapest, “preferred” rates go to the 21% of applicants in the best health. You can generally count on qualifying if you don’t smoke, you have a low cholesterol count (under 250) and low blood pressure (140 over 90, or lower), and you fall within a healthy weight range (under 210 pounds for a 5-foot-10-inch man; 175 pounds for a 5-4 woman). If you make the cut, start your online sleuthing at AccuQuote.com, Term4Sale.com and Quotesmith.com. Each has a large database of about 150 to 300 insurers and quotes prices to customers in any state. Also, unlike some competitors, each shows you quotes, rather than forcing you to call an agent to get your results. (By the way, young, healthy folks shouldn’t bother buying additional group coverage through their employers. You’ll get lumped in with those chain-smokers in accounting and pay more than you would on your own.)

If you suspect you don’t qualify for the medical elite, approach the Web a little differently. Start with InsWeb.com. This site quotes from fewer insurers only a dozen but it asks for more extensive data, which means the prices will more accurately reflect what you’ll pay. You’ll spend about 15 minutes filling out a questionnaire that asks for information such as your blood pressure, family medical history and driving record. The quotes you get will be a good benchmark for a wider search on AccuQuote and Term4Sale. (Be sure to designate that you’re looking for “standard” rates rather than “preferred.”) Any quotes on those sites that fall more than 30% below the lowest on InsWeb are likely to be too optimistic. People who aren’t in better-than-average health needn’t bother with Quotesmith, because it won’t let you sort rates based on fitness level.

Can you get better deals elsewhere? It’s enough of a possibility to merit more digging. TIAA-CREF, Allstate and New York Life (800-710-7945) don’t make their prices available on the big quote Web sites, so it’s worth checking with them directly. Shoppers in Ohio and Washington can find prices from most insurers on the consumer information pages of their state insurance department Web site (www.ohioinsurance.gov or www.insurance.wa.gov.

How to Know How Much Coverage You Need

The average insurance-owning household had $196,200 worth of life coverage in 2000 and if that seems like a thin lifeline in the age of the $400,000 mortgage, your instincts are right. “Most people are woefully underinsured,” says Linda Sherry, editorial director of the advocacy group Consumer Action. But the solution isn’t simply to buy all the insurance you can afford. Even in today’s choppy market, the extra premiums you’d pay could be earning significant returns elsewhere.

To find the right amount of coverage, you must weigh your dependents’ spending needs against their future income and assets. Our worksheet will help you do that. It’ll remind you of costs (additional child care for a suddenly single parent, funeral charges, etc.) and sources of help (investments, Social Security benefits for survivors). But remember, this will give you only a rough estimate. Ideally, you should run the numbers every two years or so to see if your needs have changed

How to Select the Right Features

Even if you pick term over permanent life, you’ll still have some jargon to wade through to find a policy that’s just right for you. Is there a chance you might still need insurance after your coverage expires? Then make sure your policy is convertible. That gives you the option to switch it to permanent at that point, regardless of your medical condition a key benefit, because premiums for brand-new policies can skyrocket as people pass middle age or as their health deteriorates. Just be sure your coverage can be converted throughout the life of the policy. Some insurers allow you to convert only in the first five to 10 years the time when it makes the least financial sense to do so. A similar provision worth getting, guaranteed renewability, lets you buy a new term policy from the insurer when your current one expires, again without having to “requalify” medically.

Term policies offer a thicket of optional “riders” to choose from, but most of them aren’t worth your time. Waivers of premium allow you to keep your policies without paying for them if you become disabled, but they often increase the price of your policy by as much as a third. Consider them only if you don’t have any other disability insurance. Spousal riders that extend coverage to your wife or husband can sound like a good deal, but they’re usually more expensive than buying a separate policy, and your spouse may lose coverage if you die. And accidental death riders, which double the payout to your family if you die in an accident, are not only expensive (adding 10 to 15% to the policy’s cost) but unnecessary: Does your family really need twice as much money to live on just because a runaway truck got you before a heart attack did?

How to Avoid Getting Burned

Cheap premiums are attractive, but they aren’t the whole story. Signing on with a fiscally fragile insurer can cost you. When insurers go bankrupt, state-administered guarantee funds make sure any claims get paid, but there are often huge delays and disputes over payments, explains industry consultant George McKeon, vice president of Conning Research and Consulting. And most states set a $300,000 cap on the death benefits they’ll pay on behalf of a failed insurer. Even if a foundering carrier gets bought, there may be problems. Hundreds of California families are still tangled in legal disputes surrounding the 1991 collapse of ExecutiveLife Insurance. Owners of its permanent life policies lost much of their retirement savings when the company that purchased ExecutiveLife slashed the value of their cash accounts.

click on “Ratings Lists” at www.standardandpoors.com and A.M. Best (search by company name at www.ambest.com. Firms with Best ratings of A- or better, or S&P grades of at least AA, are the safest bets. You’ll also want to find out whether your would-be insurer is leaving a trail of irate customers. The statistic you’re looking for is the “complaint ratio,” which compares the number of grievances filed with the number of policies or amount of premiums the insurer earns in the state. In California, for example, 16 life insurers have a complaint ratio of 0, meaning no gripes have been filed that the state has found to be justified. But on the other end of the spectrum, Conseco Life, troubled by shaky finances, has a whopping 16.9 complaints per 100,000 policies. Many state governments track such information, and you can find links to their data at www.insure.com/complaints. Some states, including New York and Pennsylvania, either don’t keep tabs on gripes or make it difficult to compare insurers. If your state is one, you can find national complaint stats for bigger insurers on the Web site of the National Association of Insurance Commissioners