Depending on your need for money, life insurance could either be an expensive burden or a bargain.
Updated: May 3, 2013 12:15PM
Q. How long can I postpone buying life insurance, and what kind should I buy?
A.You can postpone buying life insurance as long as you are certain you can postpone your death! Seriously, life insurance isn't pleasant to think about -- not only because it tends to be complicated, but because it forces us to think about our own mortality.
Not everyone needs life insurance. If you have no one depending on your income (or the value of the services you provide as a homemaker), then you've eliminated one of the major reasons for buying insurance.
Your savings will pay for your burial expenses. And any unsecured debts will be wiped out when you die.
Some people buy life insurance so they can leave money to a worthy cause, or a dear friend. But realistically, if you don't have money to leave them in your estate plan, the cost of the insurance premiums might be prohibitive.
There are many reasons to re-evaluate your life insurance needs. As job losses mount, people realize their company-paid life insurance policy may not be portable. Even retirees are considering more life insurance, as they look at the shrinking value of their investments.
There is one reason that even wealthy people buy life insurance -- and that reason is becoming more significant these days. While estate taxes are currently at the lowest level in decades -- and scheduled to disappear completely in 2010 -- you can be sure Congress will be taking a second look in the coming months.
If estate taxes do increase, then properly titled life insurance can provide cash to pay any estate taxes due upon death. (For estate tax purposes, title to the policy is held by an irrevocable insurance trust, not by the insured, thus keeping the proceeds out of the taxable estate.)
Wealthy people are already starting to buy more life insurance. And that is one reason premiums are starting to rise. Many of the most competitive term insurance companies have already raised premiums 10 percent to 15 percent -- and more are expected to follow.
Part of the reason for higher premiums is that insurance companies need to rebuild their capital base -- and their investment returns have been dismal. The best companies have huge reserves, so there is little reason to worry about their ability to provide coverage. But the combination of rising demand for insurance for estate liquidity and insurance company efforts to rebuild their asset base is pushing premiums higher. That means you should buy now -- if you have a real need for insurance.
Some people use life insurance as an investment vehicle, putting in more cash than is needed to actually provide the death benefit. This "extra" cash grows on a tax-deferred basis and can either be borrowed out, withdrawn or used to pay premiums in later years, depending on how the policy is structured.
But for most younger people, simple term insurance is the least expensive. It can be purchased on a "level" basis -- meaning the premiums are guaranteed not to rise for a period of 10 or 20 or even 30 years. I used AccuQuote.com to get the following prices for a half-million-dollar policy of 20-year level term:
At age 40, a man in the top preferred (non-smoker) category could buy this half-million-dollar, level-term policy for $360 a year. A woman would pay less -- only $310 a year.
Waiting can cost you money. At age 55, the 20-year level premium would be $1,495 a year for a man, and $1,125 for a woman.
And you can still buy this insurance at age 65, though it is more expensive -- $5,015 a year for a man, $3,185 for a woman.
Depending on your need for money -- either to provide for a survivor or to pay for estate taxes, life insurance could either be an expensive burden -- or a bargain.
Says Byron Udell, founder and CEO of AccuQuote.com:
"Life insurance plays an even more important role in a family's financial plan today than it did just one year ago. Why? Because if these people were to die today, their families would be a lot worse off than if these declines in net worth had not occurred. Life insurance continues to be the easiest and least-expensive way to replace these lost assets in the event of a premature death of the breadwinner."
Two things remain sure in life -- death and taxes. Will your family have the appropriate coverage for those two certainties? Not unless you're willing to make a plan in advance. That's the Savage Truth.HOW YOU CAN PICK TERRY'S BRAIN
To celebrate the 20th anniversary of my Chicago Sun-Times column, I'll be responding to your most frequently asked questions on a regular basis. Of course, you always can submit individual questions on my Sun-Times blog reached on the home page at www.TerrySavage.com.