Term life insurance a bargain these days

PERSONAL FINANCE

February 25, 2007|By EILEEN AMBROSE

Think about college tuition, health care and especially your electric bill, and it's easy to assume that prices only move in two directions: up and waaay up.

But if you haven't been paying close attention, you might not have noticed that one important financial product is significantly cheaper these days: term life insurance. Industry experts estimate that term premiums have fallen 40 percent or more in the past decade alone.

"This is great news," says Gary Schatsky, a financial planner in New York. "You're buying the same thing you bought yesterday at a lower price. It doesn't get any better than that."

Part of the credit goes to longevity. With people living longer, insurers can expect fewer claims in a given period and have been able to lower premiums, industry officials say.

Competition also has trimmed prices.

Term insurance, which covers you for a specific period, is simple to understand and consumers can easily shop for the lowest prices online.

If you need life insurance, this is a good time to shop for it. But the key word here is need. Not everyone needs life insurance. You buy insurance so that in the event you die, those depending on you won't take a financial hit.

Children, for instance, don't need life insurance, unless your name is Dakota Fanning, the actress. Young singles with no dependents don't need insurance. They're better off socking away money in a 401(k) and making sure they have health and disability insurance.

Breadwinners with young children clearly need life insurance. Even a stay-at-home parent would need a policy if his or her death meant that the family would have to hire a caregiver for the kids.

There are basically two types of life insurance: permanent and term.

A permanent policy is meant to be held for a lifetime and to cover costs that aren't likely to disappear over time. Families use permanent insurance to pay the taxes on multimillion-dollar estates or to fund special-needs trusts for children who will need financial support their entire lives.

But for most people, term fits the bill. That's good news because term is the simplest and cheapest. It provides a safety net to cover needs that will fade away over time. You might need a policy, say, that will cover family expenses until your youngest child graduates from college.

Term insurance doesn't have lots of bells and whistles, like permanent insurance. You die, and the term policy pays a lump sum to your beneficiary.

And term is where the big savings have come.

"It's now possible for people to buy [term] insurance at a lower cost today than they could just 10 years ago, even though they're 10 years older," says Elizabeth Caswell, an assistant vice president with the Hartford in Connecticut.

Consider these examples from the Hartford. In each case, the policyholder is healthy, doesn't smoke and is buying a 10-year term policy.

A 30-year-old man in 1996 would have paid $645 a year for $500,000 policy. A decade later at 40, that coverage would cost $310 to $500, depending on health factors. A 40-year-old man would have paid $1,920 for a $1 million policy in 1996, and $1,080 to $1,840 for the same coverage at age 50.

Premiums are even lower for women, who tend to live longer. For instance, a 30-year-old woman would have paid $610 a year for a $500,000 policy in 1996 and $260 to $380 a decade later at age 40. A 40-year-old woman in 1996 would have paid $1,450 a year for a $1 million policy and $800 to $1,320 for that policy 10 years later.

Once you've determined you need insurance, the next question is: How much?

You hear all sorts of rules of thumb: some experts suggest 10 times annual earnings; others say 20. That's a big difference. Follow the first rule, and you could be buying half the coverage you need. Go with the second, and you might be buying double the amount necessary.

Forget rules of thumb. Look at your situation. This is where a trusted adviser can be a big help in sorting out the financial impact of your death on the family.

"What do you want to cover in the case you pass away early?" says Timothy J. Maurer, a Lutherville financial planner.

Many people want insurance to cover the outstanding balance on the mortgage and pay future college bills for kids, Maurer says. After the mortgage and college are taken care of, then how much annual income will your family need? Will your spouse be bringing home a paycheck or not? Will the family need to hire full-time child care?

Do you have life insurance through your employer? Some planners don't count this coverage when determining insurance needs; others do if it's likely that workers would have similar coverage even if they switched jobs.

Don't forget that some expenses will go up with inflation over time, Maurer says. On the other hand, the amount of coverage you need to buy can be reduced once you consider that some of the insurance proceeds will be invested until the family needs the money.

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