Karl Klinger, CFP®, CLU®

Providing Personal and Small Business Financial Services

Virginia Beach, Virginia

You may have read that term life insurance rates are at historic lows and now is the time to buy.  It's worth a quick review on why life insurance is necessary and who should buy it before trying to determine the specific amount you should own.

First, a quick definition of what term life insurance is.  A term policy is a policy with a set duration and schedule of premiums (either level, annually increasing, or increasing in steps such as every five years) for the term (or coverage period) of the policy.  At the end of that term, the policy may either simply lapse or provide the option for the policyholder to renew coverage on a year-to-year basis -- but generally at a much higher cost.  Term policies provide no cash buildup -- unlike whole life or universal life insurance -- they provide only a death benefit if the insured dies during the term of the policy.  Because term insurance doesn't provide an investment component (cash surrender value) and are generally not renewable for life, premiums for term insurance are generally less than for whole life or universal life.

There is plenty of debate whether consumers should buy term or whole life.  Some critics argue that whole life is a poor choice because you might be able to get a better return by investing the cash value elsewhere.  Yet there are good purposes for these investment-feature policies and many use them as part of an estate-planning strategy.

The first point is to decide whether you need insurance.  People without dependents generally don't, while people with spouses and families generally do.  The primary point of life insurance is to replace income if a breadwinner dies or to preserve the value of one's estate for his heirs.

As for the decision of what kind to buy, it helps to get some advice.  A Certified Financial Planner^™ professional can help you determine the right insurance products to buy based on your needs and other assets.  Better still, he or she can help shape your insurance purchases as part of an overall estate plan.

A Certified Financial Planner^™ professional can help a buyer decide how much life insurance to buy and over how long a period.  Some critical questions that should be asked when purchasing insurance:

1. How much income would your spouse and your children need to replace your income over a period of years based on your current age?

2. Will your spouse or guardian need to provide childcare support?

3. Is there a mortgage to pay off?

4. Are there substantial short-term debts, like credit cards, auto loans, or business loans to pay off?

5. What are estimated college expenses for children and spouses, and when will those expenses start?

6. How much will burial expenses be?

7. Do you have any other life insurance?

8. Are there anticipated expenses for caregiving for elderly relatives or children or family members with special needs?

9. Do you anticipate substantial estate taxes when you die?

10. Do you have any other assets that can be liquidated sensibly or will bring in income?

Most online life insurance calculators found at business news and personal finance websites can help you address questions 1-8.  The last two questions require a bit more strategic thinking in terms of what you or your spouse have done with overall estate planning.  Keep in mind that youth and health will also be factors in how much insurance you can afford to buy.

Many term life policies are both "renewable" and "convertible." Renewable means you can renew your coverage (although not necessarily at the same premium) without a medical exam.  The latter allows you to convert your term life policy into a cash value policy of the same face amount from the same company (although at a higher premium), should this make sense during the term of the policy.  A convertible policy can guarantee your ability to obtain permanent life insurance coverage should you become uninsurable due to a change in health -- a very common occurrence.  Again, the kind of coverage you choose should depend on your own personal needs and a Certified Financial Planner^™ professional can help you determine what those are.

Also, as you check various companies, it's important to work with the most financially healthy carriers.  Insure.com provides free ratings from Standard & Poor's on various insurers, and many public libraries have subscriptions to ratings from A.M. Best.

One more thing.  Don't buy insurance and forget about it.  Make sure that every few years you review your insurance purchases as part of your overall financial plan.  Life circumstances change -- incomes rise and fall and family size changes.  Your insurance holdings always need to reflect current needs and conditions.