Kiplingers Life Insurance


Published on

  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Kiplingers Life Insurance

  1. 1. How Much “truly is an art as well as a strategy to calculate how . science,” says Tim Maurer, much coverage to buy and N O TI a financial planner in Hunt to form a plan that’s easy toLife Insurance Valley, Md., and coauthor update. The idea is to assess of The Financial Crossroads U whether you need extra (Companion, $25). IB coverage or different poli- TR cies only after you projectDo You Need? IS A simple strategy. The pur- your life-insurance needs as pose of life insurance is to D the sum of four categories. allow your family members R expenses. A funeral,Use our formula to cut through the confusion. to pay the bills and live their lives as planned despite your FO burial and related expenses FinalBy KimBerly lanKford T absence. That’s why some O tend to cost $10,000 to .N experts and most online $20,000. Your beneficiariesunpredictable investmentand job markets are rough no mortgage and a substan- tial retirement fund. L Y calculators sponsored by the insurance industry seek may be able to get the tax- free proceeds from insur-on savings and retirement Low inflation and a re- N to figure the chunk of in- ance faster than if theyplanning. They also compli- covering stock market may O vestment capital it would waited for money from yourcate the issue of how much tempt you to low-ball your G take to replace all of your estate. Use $15,000 as a ball-life insurance is right for life-insurance needs. But IN income for 20 years or lon- park and your family andwhat kind you should buy. other financial realities, such as puny yields on rein- E AD ger, held securely in Trea- sury or municipal bonds Mortgages and other debts. Standard formulas—such vested lump-sum benefits, R and certificates of deposit. Total your mortgage bal-as buying coverage equal may require that you have AL With savings yields low and ance, car loans, student loansto eight to ten times your N more coverage, not less. And the prospect of longer life and any other debts thatannual income—are inade- O you’ll likely experience life S expectancies in retirement, would be a heavy burden on ERquate shortcuts. Online cal- events that call for changes this approach tends to aim your survivors. They mayculators are apt to tell you in your insurance: marriage, high, especially if you as- choose not to retire the mort-to raise your coverage by P parenthood, homeowner- sume raises and promotions. gage, especially if the inter-$1 million even if you already R ship, college expenses and “You can find people who est rate is low, but the moneyhave insurance. The truth is FO retirement. Instead of rely- are extremely minimalist should be available so that PYthat life insurance is a per- ing on rules of thumb, you’re with insurance recommen- they won’t face the prospectsonal affair. Two couples better off taking a system- dations,” says Maurer. “But of being forced to sell. Omay earn equal salaries, but atic approach to figuring I see an overabundance of Cit’s silly to say that someone your life-insurance needs. people who end up justify- Education expenses. This T EDwith four young childrenshould have the same cover- That’s easier than it sounds, as you’ll see from the fol- ing more insurance than I think is reasonable.” calculation can be tricky because you need to con- INage as empty nesters with lowing process, because it Instead, he offers a simple sider the cost of college PRYou nEED MoRE liFE insuRAnCE iF You... Tie the Knot Have a Child Buy Your Dream House Are About to RetireYour new spouse might depend It takes a lot of money to raise When you settle into your family’s No more insurance from work. If youon you even if he or she earns a child—and it doesn’t get any permanent home, guard against die, your spouse could lose pensionas much or more than you do. cheaper if you’re not around. its loss in case tragedy strikes. and some Social Security income. 08/2010 Kiplinger’s personal Finance
  2. 2. » MONEY // INSURANCEat the time your kids enroll. even $250,000. If you’re the of thousands of dollars sents dozens of life insurers.But Maurer devised a sim- one with the medical condi- should cost just a few hun- Women pay less—just $311ple solution. College costs tion, you’ll find it tough to dred dollars a year. per year for $500,000 inhave been rising by about buy additional coverage later For example, a healthy coverage and $558 for5% a year, which is the same at a price you can afford. 40-year-old male nonsmoker $1 million. It’s not as easyrate he conservatively ex- For most families, this might be considering a 20- as it used to be to qualifypects life-insurance pro- exercise will work out to year, $500,000 term policy for the absolute lowestceeds to grow over time. an amount in the high for $360 per year. But he rates. You can get pricesHe recommends looking six-figures, possibly even could buy $850,000 of from dozens of companiesup current costs for colleges $1 million or more. But don’t coverage for $576, or a at or .you’re considering, deciding be frightened. With term $1-million policy for $645, N O TIwhether you want the in- insurance, boosting your says Byron Udell, owner ofsurance to cover all or a death benefit by hundreds AccuQuote, which repre- U The time factor. Also considerportion of the tab, and add- IB how many years you’ll need TRing the amount in today’s insurance. If you’re in finedollars to your life-insur- * Term vs. permanent physical shape, you can buy ISance calculation. GET THE BEST OF BOTH a new policy and lock in the D price for 20 years. Because Rincome replacement. Onceyou cover funeral expenses, TERM INSURANCE IS POPULAR BECAUSE ALMOST EVERYONE CAN afford plenty of it. Some young people buy the amount of perma- F O prices for term have been dropping steadily, you maydebts and education, your nent insurance that fits their budget, rather than the protection T not pay much more to ex-family won’t need to replace they need. That’s not smart. O tend your coverage if you But it can make sense to combine term and permanentN Y.100% of your income—and insurance reshop in, say, five years.that’s where the art part Some term policies come L with multiple policies or by buying a convertible-term policy andof the calculation comes in.Maurer recommends cover- convertible-term policy is that insurers don’t O N a new medical making a series of conversions over the years. One advantage of a require with the right to convert to permanent life insurance,ing 50% of current pretax G exam when you make the conversions. That essentially gives you a which you can keep for theearnings until retirement. IN pass if you gain weight, develop high blood pressure or even survive rest of your life regardless ADYou can translate this into a a bout with cancer. of health. Premiums will betarget lump-sum benefit by higher than for term at the E Northwestern Mutual Life provided this example for a 27-year-dividing it by 0.05. For exam- Rit to whole life $100,000 at a time. If you old man who starts by paying $317 for $500,000 of term insurance, beginning, but they usually ALple, if you earn $100,000, and then gradually converts remain level indefinitely.divide $50,000 by 0.05, shift $100,000 to whole-life at age 28, your annual premium would The best reason to considerwhich works out to $1 mil- jump to $1,300. IfN shift another $100,000 at age 31, your pre- whole-life or universal-lifelion. That assumes the insur- S O you mium would rise to $2,600. Your premium would gradually increase insurance isn’t the accu-ance benefits will earn 5% R whenever you shift money to the whole-life policy, topping out at mulating cash value, al- $7,200E age 40, for the entire $500,000 of whole-life insurance.a year over the long haul, P at though that’s part of thea conservative back-of-the- R value will rise every year, as will the death benefit. By age 65, As long as the insurer remains strong and solvent, the policy’s deal. The real issue is FOin this example, the benefit is projected to be $990,000 and theenvelope figure. cash whether you’ll need cover- Add all four categories age beyond 20 or 30 years— PYto estimate how much life cash value $475,000, which can be borrowed, withdrawn or tapped or after age 65, when terminsurance is appropriate, O to keep the policy in force without paying additional premiums. gets expensive. You might Cthen tweak the number to This kind of flexibility is attractive to Nirmal Bivek, a 32-year-old want permanent insurance, EDreflect personal circum- banker in Atlanta, who bought slightly more than $1 million in life- for example, if you need tostances. You might increase insurance coverage when his 3-year-old daughter, Sarina, was born. protect kids with special T INit if you don’t have a pen- Bivek has already converted some of the coverage to whole life and needs who will always relysion, but you could decrease on you (or your estate) for PR expects to convert more of it as his income grows.your coverage if your spouse He added more insurance when he and his wife, Vijal, were ex- support, or if you want toearns a substantial salary. pecting a second child and when they bought a vacation home. “I’m leave money to a school,If you or a family member in good health now and term is cheap,” says Bivek, “so I’m buying as charity or your childrenhas a troublesome medical much as I can now and converting it over time.” and you don’t expect tohistory, add $100,000 or afford it any other way. I (#21079) Reprinted with permission from the August 2010 issue of Kiplinger’s Personal Finance. © 2010 The Kiplinger Washington Editors Inc. For more information about reprints from Kiplinger’s Personal Finance, contact PARS International Corp. at 212-221-9595.The Northwestern Mutual Life Insurance Company, Milwaukee, WI. There are policies with guaranteed and non-guaranteedelements. Clients should contact a financial professional to determine the type and amount of coverage that best suits their needs.Approval for the total amount of coverage is subject to the financial and medical underwriting of the company.53-0166 (0610)