How to Get Life Insurance

Contrary to what the TV commercials say, not everybody needs life insurance. It protects against lost income--no more, no less. If you don't have dependents or if you are well-off financially, your family may not need an influx of cash when you die. But if they would, find out how to make an educated decision on what kind of coverage you need for how much.

Difficulty: Moderate

Instructions

The basics

1. Calculate how much coverage you'll need. Determine how much your beneficiaries need to live on, and for how long. Losing a loved one is emotionally and financially difficult, and dependents may need a period during which they won't have to worry about money. While two years is an average cushion, some people may want to make sure their beneficiaries are taken care of until they finish college, while others want their loved ones to be set for life. Calculate all expenses for the covered period, including bigticket items (college, mortgages), as well as living expenses (clothes, food). Then subtract the amount of money you think your beneficiaries will make from salaries and investments (remember, adults may not be able to go back to work right away). By subtracting all their estimated expenses from established income, you'll get a basic idea of how much insurance coverage you need.

2. Analyze what type of coverage best meets your needs. Think of insurance in terms of decreasing protection as you get older. When you are younger and have kids and a mortgage, your family needs protection. As you get older, your kids have graduated and you likely have few or no payments left on your mortgage, so you need less protection.

3. Check the ratings. Insurers run the gamut from shaky upstarts to solid, household-name institutions. Most companies are rated for financial strength and claims-paying ability by independent rating agencies. Ratings from A.M. Best, Moody's, and Standard & Poor's are the most often cited.

Borrow against your life insurance

4. "Borrow" money from a cash-value life policy as an absolute last resort. If you own a home, consider an equity line before borrowing from your cash value. With an equity line, your interest is deductible, and you will most often get a better rate than the insurance company is willing to offer.

5. Contact your insurance company if you have no other options and find out how large your cash value is and how much you can borrow. The amount available to you depends on how much cash has accumulated in the policy. That in turn depends on how long the policy's been around, how much you've paid into it and other factors. For example, if you have a $300,000 policy with a cash value of $50,000, your borrowing capability will be based on the $50,000 cash value.

6. Understand that when you borrow against your cash value, you must pay interest on the amount you borrow. The interest you pay does not go into your cash value, as many people think. Instead it goes back into the pockets of the insurance company.

7. Carefully check the terms and conditions of the loan. Some insurance companies restrict how much of your cash value you can borrow and have special payback terms. Make certain that the interest rates are lower than what other loan sources, such as home equity loans, are offering.

8. Withdraw the money. There is no restriction on how you can use the money, as there is with a 401(k) withdrawal, for example. You don't ever have to pay it back, as long as you're willing to have a reduced death benefit for your beneficiaries when you do pass away. But you'll also pay interest on it for the rest of your life. On top of that, any interest you owe on that loan will also be deducted from the payout.

Tips & Warnings

• See the related eHow article titled How to Create a Living Trust.
• Know the terminology. The premium is the money you pay to keep the policy in force. The death benefit is the payment to be made upon your death, as dictated by the policy. The beneficiary is the person or persons who will receive the death benefit.
• The cost of term life insurance has been falling, so you might consider replacing an existing term policy. Check current rates for term life insurance at comparison sites such as Term4Sale.com.
• Evaluate whether it makes sense to get an insurance policy on someone else, such as your spouse or business partner, whose death would cause real hardship for you. Insurance policies can be purchased for just about anyone.
• If you borrow from a policy that is characterized as a modified endowment contract, you could create a taxable event under certain circumstances.
• If you stop paying premiums after eight or ten years when the cash value has risen enough, and then take a loan against it, you may actually have to continue paying annual premiums. Find out in advance if you have this type of premium policy and under what circumstances you'd have to start paying premiums again.

[Hadley]

on 4/21/2008 When considering life insurance, make sure you understand the pros and cons of both term life insurance and permanent life insurance before choosing a policy. There's a helpful article that explains both types of life insurance at http://www.term-life-online.com/term-life-insurance-vs-permanent-life-insurance.html

Term life offers temporary life insurance for a specific number of years, usually 1-30 years, that's why it may be less expensive than permanent life insurance.