Buying life insurance isn’t a sexy purchase, but it’s fundamental to financial planning. That’s why it’s alarming that ownership of policies in the U.S. is at a 50-year low.
About a third of U.S. households have no life insurance, according to LIMRA, an insurance industry research group.
That’s a shame, because life insurance, especially simple term life, is cheaper than ever and could prevent financial disaster for your family. (If nobody relies on your income, you might not need life insurance.)
A 30-year-old can buy $250,000 of 20-year term life insurance for $158 per year, or $3 a week.
The economic downturn undoubtedly shifted Americans’ focus away from life insurance to competing priorities for household money, such as putting food on the table.
Besides being cash-strapped, another reason people don’t buy life insurance is because they don’t know much about it.
“To shed some light, here are some straightforward questions and answers about life insurance, focusing on term insurance.
Question: What is life insurance?
Answer: Essentially, it’s paycheck replacement if you die. Life insurance is a contract that agrees to pay money to a beneficiary, often several hundred thousand dollars, if you die while the contract is in place.
Term life insurance is in effect for whatever term you buy, such as 10, 20 or 30 years, as long as you keep paying premiums.
More complicated forms of insurance, such as whole life, universal life and variable life, often add investment components and are far more expensive. They stay in effect for life if you keep paying premiums.
Question: Who needs it?
Answer: Determine whether you need life insurance by answering the question, “Who would miss my paycheck if I died?” If you’re single or have a working spouse and no children, you might not need life insurance.
But some people like to have a small policy to pay for funeral and burial costs, to make a donation to a charity or to leave an inheritance.
Question: How much do I need?
Answer: A common rule of thumb is six to 10 times annual income. That gives you a ballpark figure, but it’s inadequate. The amount you need depends on how old you are and how many working years you’re looking to replace.
Do you want enough insurance to pay off the mortgage, send kids to college or pay for a daughter’s wedding?
And consider that the payout from a term life policy stays the same, but your expenses are likely to rise over time.
Question: How much does it cost?
Answer: It depends. Healthy, younger, nonsmokers pay less because they are less likely to die. Getting a new policy involves filling out forms and undergoing a free medical exam, usually at your home.
Results of the exam will help determine what your rate will be. A 40-year-old male nonsmoker in great health might pay $355 a year for $500,000 worth of coverage over 20 years, according to figures supplied by AccuQuote.
Question: Where should I buy it?
Answer: You can shop online, with many online brokers offering help by phone too. Or, you can use a broker or agent in person. Get several quotes because premiums for the exact same policy can vary widely.
But you want to make sure the insurer will pay when you die, so make sure it’s highly rated. Many comparison sites list ratings along with price quotes, or you could check ratings at such sites as StandardandPoors.com, Ambest.com and FitchRatings.com.
Insure.com recently released customer satisfaction ratings for large insurers, available online at tinyurl.com/7xj7b5b.
Question: What if I already have life insurance?
Answer: If you bought a 20-year policy, for example, you’re not obligated to keep it for 20 years. You can walk away from a term policy whenever you want.
On the Web
A sampling of calculators to help determine how much life insurance you need. Use several; some of these are managed by the companies trying to sell you insurance.
Insure.com: www.tinyurl.com/insurecalc Bankrate.com: www.tinyurl.com/calcbankrate AccuQuote.com: www.tinyurl.com/accucalc Life and Health Insurance Foundation for Education: tinyurl.com/lifehappenscalc
Informational sites:
• Insurance Information Institute: www.iii.org
• National Association of Insurance Commissioners: www.insureuonline.org
• Life and Health Insurance Foundation for Education: www.lifehappens.org
Some online brokers:
Taxes owed
Life insurance proceeds paid to a taxpayer because of the death of the insured person are usually not taxable. But when a policyholder surrenders a life insurance policy for cash, the taxpayer must report and pay tax on any proceeds that are more than the cost of the life insurance policy.
Taxpayers should receive from their insurance company a Form 1099-R (Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.), showing the total surrender proceeds and the taxable portion.
More information is available in IRS Publication 525 (Taxable and Nontaxable Income) available at IRS.gov or by calling 800-829-3676.
Claudia Buck, McClatchy Newspapers
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