Why You Need Life Insurance

         Despite the fact that most American families have less to fall back on financially than when the economic downturn began, ownership of individual life insurance has hit a 50-year low, according to a new LIMRA study.

         The Trends in Life Insurance Ownership study, found that only 44 percent of U.S. households have life insurance. The number of U.S. households that have no life insurance whatsoever is growing. Today, 30 percent of households (35 million) have no life insurance coverage, compared to 22 percent of households in 2004. Among households with children under age 18; 11 million have no coverage. September is Life Insurance Awareness Month, someone should bang the drum a little louder.

         “Nearly everyone knows they should have life insurance, but many are often reluctant to get it. A recession is simply another reason to put off purchasing coverage, but that can be foolish should one’s family need it,” says Leslie Strebel, partner at The Strebel Planning Group.

Some folks are just turned off. “Far too many agents push permanent life insurance (with its higher premiums and rich commissions) prior to properly taking care of a basic level of protection (and far too many agents push certain permanent products or companies that are inferior to other permanent options available),” says Scott Witt, owner of Witt Actuarial Services.  One residual effect of this is that many consumers are reluctant to deal with anyone in the insurance industry, because they are familiar with pushy sales tactics, have read articles on life insurance in the financial media, etc. – and unfortunately this means that a lot of people that could afford an extremely cheap term insurance policy never take the initiative to actually get the coverage in place, he adds.

         Perhaps you thought life insurance was optional. Maybe, but probably not. Here’s what you need to know.

         Protect your finances

         “Many families today cannot make ends meet on one income. If the unthinkable were to happen and the family loses one provider to death, the financial consequences can be challenging at best, and catastrophic at worst,” says Caren Levine, a CPA with First Financial Group/MassMutual.

         Life insurance helps ensure people do not leave their loved ones’ financial future to chance. “Life insurance can mean the difference in retaining a home, funding children’s education and a surviving spouse’s own retirement in some cases,” she adds.

         Some life insurance products, like whole life insurance, offer living benefits. Whole life insurance provides death benefit protection but also grows in cash value. The cash value accumulates on a tax-deferred basis and may be used for a variety of reasons over a lifetime. Policy owners can borrow against the cash value of the policy for any purpose, says Levine.

         Life insurance can have many purposes, such as to create an estate, cover a specific liability, income replacement, tax deferral, buy/sell agreements, estate planning, final expenses, among others, says Tony Keena, a financial advisor with Estate &  Business Planning Group. What most people don’t consider is the income replacement aspect. “The stay at home parent is the most under insured person, bar none. One must look at what it would take to replace the income of the lost spouse should something happen to them,” he says. For example, if a wife has a husband who earns $100,000 a year, they would have to have at least $1 million of coverage to replace the income of the lost spouse (assuming a 10 percent return). If one where to assume a 5 percent return (more realistic), they would have to have at least $2 million of coverage. This is just to replace the income of the lost spouse.

         Life insurance should not be categorized as non-essential when times get tough, says ReKeithen Miller, a financial planning associate with Palisade Hudson Financial Group.

         Life insurance isn’t just for families. “If you’re single and don’t have dependents, you still need insurance. If you are uninsured and die with debts, your heirs may have to cover the unpaid expenses,” says Miller.

         Life insurance 101

        Okay, so you’re thinking you want to go ahead and get some life insurance. Where to start and how to get the best rates?

         Figure out what you need. There are many factors that go into how much coverage you need. Take into account everything you provide for your family, salary, health insurance, 401k and retirement savings, and services you perform for the family, child care, cooking, home maintenance, for starters. An insurance professional or financial advisor can help you determine an accurate figure and choose appropriate coverage.

         Buy it now. Premiums for the same coverage increase the older you become. And the longer you wait, the more you risk developing a health condition that could increase your premium further, points out Maria Portales, financial services representative and production manager with MetLife.

        Shop around. Compare coverage, and company quality. Consider getting more than one quote on comparable policies, and ask questions about the policy’s renewal and withdrawal provisions, says Portales. Quality is essential. Is the insurance company financially secure? Does it have a good claim payment history, good customer service? What do independent rating companies like Standard & Poor’s, A.M. Best, Moody’s or Fitch say about the company? Your state insurance department and the better Business Bureau can provide valuable information on finding an insurance company. “Before buying a life insurance policy, be sure to read the policy carefully and get clear answers to all your questions,” says Portales.

         Avoid mistakes

         If you are considering replacing or trading an existing policy think carefully. Whether you switch policies within the same company or switch from one company to another, your new policy would be subject to new underwriting, which may affect how much you have to pay, says Portales. Premium rates are partly based on age, so a new policy is likely to be more expensive. Changes in your health, or the way the new insurer takes your health into account, can also affect your premium.

        If you are considering increasing your total life insurance, it’s usually better to keep your old policy and increase its face amount if you can, or simply add a new policy, she adds.

        Portales has many stories. A client’s father, who had four children, purchased personal insurance with her but canceled shortly after buying it because he decided to rely solely on his work insurance for basic protection. His company reduced his hours, changing his status to part-time which meant he lost most of his benefits. He never got around to buying another personal life insurance policy. He was killed in a car accident a year ago, putting his family in an enormously stressful situation, not only because he was gone, but without sufficient funds they also lost their home.

         She prefers to focus on the positive. Recently, a 29-year-old client was killed in a fire arm accident. His wife was left with children ages 3 and 6 and a life insurance policy of $250,000 that will allow the wife to remain in their house and provide an education for the children. Says Portales, “Life insurance is not mandatory, but it should be the foundation of any financial planning at any level you may be in life.”