Life Insurance: The Ultimate Put

People have car insurance because bad things can happen to their car. Heck, my window was smashed and radio taken a month ago -- insurance covered all but $500 of the $1500 cost. People have insurance on their house because a small fire can cause tens of thousands of dollars in damage. But many people don't have life insurance because they're squeamish about contemplating their own mortality.

I have no illusions about whether I'll live forever. Among my peers -- perfectly healthy people in their 30s and 40s -- nine have succumbed to heart attacks, an allergic reaction to a food additive, a bout of the flu, pulmonary edema while hiking on Mount Kilimanjaro and car accidents. As a native New Yorker, I knew several people who perished in the World Trade Center attack.

I don't sell life insurance products, but I do advise my clients on the minimum levels they should have in place. There are some straightforward formulas for calculating what that amount should be, and some additional considerations on term length. Lastly, there are both Internet and real-world places to go for the cheapest policies.

Life Cycle Analysis

Does everyone need life insurance? It depends on your stage of life and who is relying on your income. I don't see any need for a teenager, or a single person without dependents, to have life insurance. The money that you would spend on premiums is better directed toward savings.

The picture changes when you get married. Couples make decisions -- for example, obtaining a mortgage to buy a house -- which assume a continued income stream from one or both partners. Additional financial commitments appear with children: food, clothing, college tuition. With dependents in the picture, life insurance makes sense even for a nonworking spouse (because the survivor will need funds to pay, for example, for a nanny).

As a couple approaches retirement, the need for income replacement diminishes because (hopefully) the family's savings and retirement accounts are sufficient. However, families with large estates that would be subject to tax should buy specialized policies, which can be used to pay off estate taxes. (No, I'm not counting on the permanent repeal of this tax.)

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David Edwards is a portfolio manager and president of Heron Capital Management, a New York management firm. Edwards was a contributor to Harry Domash's Fire Your Stock Analyst: Analyzing Stocks On Your Own available at Amazon. At the time of publication, his firm was held positions in Dell and Amazon.com, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Edwards appreciates your feedback and invites you to send it to David Edwards.