NEW YORK (MainStreet) — January is traditionally a time for tuning up the household finances. But for too many households, that does not include life insurance. These policies can stay in place for decades, and as one gets older a new policy typically costs more than one bought years before — so many folks just pay the premium and forget about it.
Ah, but that can be a mistake. As you get older you may get wealthier, meaning you have more to protect and can afford a bigger policy. And certain life changes should spur a review — things such as getting married, having children, buying a home or even getting a new job.
Though the landscape is littered with confusing products with investment features, basic death coverage provided by a "term" life policy is inexpensive and easy to understand. In exchange for an annual premium, survivors will get a tax-free payout if the insured person dies during the term of the policy. You might, for example, get a 20-year policy when you have a young child, replacing your income if you die before the child is grown. After 20 years, you stop paying the premium and are no longer covered, but by then your child will be on her own. Depending on your age, you might find a $500,000 policy for 20 years for less than $2,000 a year.
That sounds like a huge death benefit, but the trade association Limra says the average parent should have a policy large enough to replace seven to 10 years of income. A stay-at-home parent or non-working spouse needs coverage to pay for childcare and other help the survivor will need.
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But Limra says about a third of households have no life insurance, while the rest have enough coverage that, on average, replaces only about 3.5 years of income.
Royal Neighbors of America, a Rock Island, Ill., insurer, says a term life policy is often an ideal choice for newlyweds. It is cheap, and because the terms are simple, comparison shopping is easy. A 10- or 20-year policy will protect the couple as they build up assets that might eventually eliminate the need for life insurance. Because there's no complex investment feature, you can drop the policy at any time without sacrificing anything, just as you might drop your car insurance. That makes it easy to later replace the term policy with a permanent policy that would last a lifetime and build cash value along the way.
Though term policies are often the choice for parents who want to protect children, Royal Neighbors suggests looking into whole life policies as well. These offer permanent insurance plus an investment component that builds cash value. That could be valuable if the family needs money for college or some other purpose. The tradeoff is cost: Whole life can be much more expensive than a term policy with the same death benefit. The investment feature can be hard to understand, and many experts recommend buying a simple term policy for death protection and investing in other ways.
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Royal Neighbors suggests families also considering increasing life insurance coverage after buying a home. A home is a long-term financial commitment that could be difficult for the survivor to meet. If the insured person dies, the death benefit can be used to cover monthly payments or to pay off the mortgage.
Getting a new job can also be a reason to increase coverage, as household expenses generally go up as income does. A bigger life policy can be a wise choice if other assets, such as investments, have lost value.
There may come a time as well that the household no longer needs life insurance. As mentioned above, insurance my not be worth the cost after the kids have grown. And, after a divorce or death of a spouse, a policyholder may no longer need coverage. Life insurance is to protect your dependents. If you have none, you don't need it.
— By Jeff Brown for MainStreet