It's Life Insurance Awareness Month

10/08/2012 9:30 am EST

Focus: RETIREMENT

Terry Savage

Author, The Savage Truth on Money

It pays to know which kinds of policies are available so you can determine what fits your needs, writes MoneyShow personal finance expert Terry Savage.

Life has its share of risks—but there is one sure thing: None of us is getting out of this alive! We are all going to die. The only, and greatest, uncertainty is when that will happen!

If someone you care about is dependent on your current income and future earning power, you should probably consider how he or she will replace that cash flow. It is the height of selfishness and denial to believe that you can wait until tomorrow to think about it.

Life insurance is about the risk that you will die at an inappropriate time. So you’re hedging your timing bets with money to replace your “value” to those who depend on your current—and future—earnings.

This is life insurance awareness month—but you don’t need to spend a whole month thinking about your life insurance needs. The most important issue is not which type of insurance is best for you, but that you purchase some form of life insurance to benefit loved ones who would suffer financially in your absence!

How much insurance do you need? Think about what your dependents would endure over the years without your earnings stream. Now you’ve made your first big insurance decision—and you’re ready to move on to specifics.

Term Life
Term life insurance is the least expensive and simplest form of insurance. The premium dollars you pay to buy this insurance cover the mortality costs—the likelihood that you will die this year. There is no extra cash buildup within the policy.

Ordinarily, as you get older the cost of life insurance should rise, in line with the likelihood of your death. But the insurance industry has gotten around this issue by creating level term—a guarantee that the annual cost will remain the same for 10, 20, or even 30 years.

With term insurance, as long as you keep paying the annual premiums (which you may pay monthly or quarterly), he policy will stay “in force,” protecting you and paying the death benefit to your designated beneficiaries.

Term insurance is the least expensive kind of insurance, and you don’t need an insurance agent to purchase it. You can go to online services, such as www.AccuQuote.com (888-412-5433) or www.TermQuote.com, to compare prices, which are likely to be a lot less expensive than you may think. The application process is simple, but you may be required to take a quick physical exam to see if you qualify.

It’s a great misconception that life insurance is “too expensive.” In fact, term life prices have been falling in recent years, as the efficiencies of marketing through the Internet have taken over. If you’re a non-smoker in good health, the cost for your policy may be just a few dollars a day, depending on your age and gender. You won’t know until you search for prices.

Whole Life
The problem with term insurance is that the term ends—and it may leave you uncovered for insurance in 20 or 30 years, when you are not healthy enough to qualify for a new policy. That’s why many people turn to various forms of whole life insurance, which will cover your entire lifetime.

With these policies, you pay higher premiums, but some of that money is “saved” inside the policy, earning interest or invested to build up even more cash. Then, in future years, you can borrow out some of the excess cash—or use it to pay premiums when you’re older and have stopped working.

One warning: Many of these whole life, or universal life, or universal variable life policies are shown with “illustrations” of money growing inside the policy to pay premiums when you are retired. But illustrations are not guarantees. And in this low-interest rate environment, it’s wise to ask for an insurance checkup to make sure you are paying enough in premium to keep the policy going in later years.

And here’s a second warning—one that most potential policy buyers won’t find out until next year. The insurance industry will face new policy reserve requirements in 2013 on many cash-value policies. It’s another unintended consequence of Dodd-Frank.

Setting aside more reserves will increase premium prices. So if you’re planning to buy a cash value policy, don’t delay. Do it now, before prices go up.

Find out more about life insurance at www.LifeHappens.org—a non-profit devoted to educating consumers about life insurance.

This is a wakeup call. Don’t fall into the denial trap—the belief that by not thinking about your mortality you will become immortal. Instead think about it in reverse: If you are well prepared, you won’t tempt fate! That’s the Savage Truth.