Updated: May 3, 2013 12:14PM
Originally published: June 20, 2005
This Father’s Day, I publicly want to thank my father for all his love and support as he turns 85 in a few weeks. In fact, when you add up all that a hard-working father -- or mother -- means to a family, you realize it’s impossible to put a financial value on their contribution. But that’s just what families must do when considering the purchase of life insurance on a working parent.
Sadly, the statistics show that most American families are woefully under-insured. Only about one half of the people in the country own individual life insurance. Those who do carry an average of only 2.3 times their annual income, according to Byron Udell, president of Accuquote.com, the largest online service for purchasers of life insurance.
Consider the family that has only two years of income coverage. Could your family replace the bread-winner’s earnings in just a couple of years? And in the meantime, could they continue to pay the mortgage or college tuition that comes from your paycheck?
Those are questions that make people squirm. It’s a technique successfully used by life insurance salespeople for generations, reinforced by television and print commercials. And now it’s my turn. I’m not selling insurance -- just reminding you that you should be buying.
You don’t necessarily need an agent to get coverage, although more complex situations might require advice. But buying simple term life policies online is easier and far less expensive than at any time in the past. You need to know just a few basics:
Term vs. cash value. Term insurance is the least expensive form of life insurance, because you pay only for the death benefit, and don’t build up tax deferred savings. Premiums for term insurance will rise every year as you get older, unless you buy “level term.”
Level term. Insurance companies recognize that a policy that rises in price every year isn’t very attractive. So they created level term, with premiums guaranteed to stay the same every year for 15, 20 or even 30 years. You’ll pay more for your policy in the early years, but have peace of mind in knowing your premiums won’t rise. You don’t get cash value, but owning this policy for 20 years should cover the exposure of your mortgage and college for your children.
Cash value policies. There are many different kinds of policies that build cash value. Some even promise to build up enough cash in the early years, so you won’t have to pay premiums later. If you own one of these policies, check the cash buildup each year, and ask the insurance company if there will be enough money to keep the policy working “in force” for your lifetime.
Preferred risk. The annual premium, or price, you pay for your policy depends a lot on your age. But it depends even more on your state of health. For instance, smokers pay two to three times more in premiums for the same policy.
Return of premium. Pay a little extra each year, and if you’re still alive at the end of your 30-year level-term policy, you’ll get a tax-free refund of all the premiums you paid.
Once you understand the basics, you’re left with two questions: How much coverage should I buy, and how much should it cost? Let’s reverse the answers. Maybe when you see how relatively inexpensive term insurance has become, you’ll decide you can afford more. But at least, total up your family’s needs, and imagine how they’d do without your income. That will give you a ballpark figure on the amount of coverage you should have.
You can get a firmer grip on cost by going online to one of the quotation services such as Accuquote.com. In the above chart are the figures they gave me for male and female (females live longer, so they pay less because each year their mortality risk is lower) for $250,000 in 20-year level-term insurance, assuming preferred-plus risk category (no impairments and non-smoking).
Remember, these are annual prices, not monthly! And if you were to buy $500,000 in coverage the prices would be less than double the price for $250,000. Now what’s your excuse?
We’ve just finished the season of honoring our parents. Now it’s time for parents to honor their financial commitment to their dependent families by making sure there’s enough life insurance. Money will never take the place of a loved one. But it will make part of the transition easier. And that’s The Savage Truth.
Terry Savage is a registered investment adviser. Distributed by Creators Syndicate.