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Is Your Life Sufficiently Insured?

Consumer Reports Editors

Economic turmoil is one more reason you might need to update your coverage now

You probably know why life insurance is an important support beam in a strong financial house: It will provide income for your spouse and dependent children in the event of your untimely death. That's why young parents are a key market for insurance agents.

But for many, life insurance continues to be a worthwhile expense even after the children finish school and fly from the nest. This is especially so because of economic and social trends and medical advances.

For starters, many Americans who tapped their home equity or traded up to bigger homes and loans during the go-go years have added decades of mortgage payments at the same stage of life when World War II generation parents owned their homes free and clear. That, combined with underwater home values for many home­owners, is a debt sentence for your survivors if you don't have an adequate amount of life insurance.

Societal changes have also created new needs for coverage. Working couples who delayed having children might still have dependant kids when they're in their 60s. Ditto for blended and new families formed in later-life second marriages. Last year, 6 percent of married men in households with children under 18 were 55 or older, up from 3.6 percent in 2000, according to the U.S. Census Bureau. And parental financial obligations rarely end at 18, especially for college-bound kids.

Finally, because of greater health awareness and advances in medicine, your surviving spouse may well live a decade or two after you die. Those sunset years will be costly, and a sufficient death benefit will help push back the day when he or she might outlive your joint assets.

In these uncertain times, it's especially important to re-examine your life insurance needs to make sure your coverage is up-to-date. This report reviews five questions you need to ask and shows how to get the best value for your premium dollar.

How Much Do I Need?

"For a lot of working people with children and a stay-at-home spouse, the very least amount of life insurance they should have is $1 million," says Mary Dean, owner of Dean Consulting and Associates, a fee-only financial planning firm in San Diego, Calif. But she recommends a more thorough analysis tailored to your particular family profile. The goal is to figure out how much money will be needed to adequately support your children through college and your spouse through retirement. So the future cost of college for your kids, your mortgage payoff, and the income needs of a spouse who could live to 90 are the most important items to factor in. "It gets to be a big number," she says.

You can work the numbers with the help of a good financial planner who charges a fee for his or her services instead of getting paid from the commissions earned from selling you a particular type or brand of insurance. Find such assistance at www.napfa.org, the Web site of the National Association of Personal Financial Advisors, whose membership is made up of 2,000 fee-only planners coast-to-coast.

You can also use one of many online calculators. We like the one provided by the American Institute of Certified Public Accountants, which you can find by going to www.360financialliteracy.org and entering "life insurance calculator" in the search box.

What Type of Policy Is Best?

Insurance agents push a wide range of products, but the two major types are permanent and term life insurance. Permanent life (which includes whole, universal, and variable life policies) is a mix of life insurance and an investment account that pays a benefit when you die or the built-up cash value if you liquidate it before your death. Term life is pure insurance protection that provides a death benefit if you die within a set number of years and typically nothing if you live beyond that term.

Although it may seem that a live-or-die payout is better than having to die to get a benefit, you pay significantly more to get the twofer of permanent life, while term is bargain-priced. For example, a 49-year-old male California resident in top health can get a $1 million term life policy for level monthly premiums of about $160, while the same coverage from a whole life policy would cost about $760.

The higher cost of permanent life goes to the investment side of the policy and to fees and commissions. In many cases, the investment returns are neither transparent nor reliable. "Every time I look at the rate of return of cash-value vs. term insurance, I'm not impressed," says Glenn S. Daily, a fee-only life-insurance adviser in New York City. He adds that insurers often overstate the rates of return promised.

Cash-value insurance can provide estate-planning and tax advantages for well-to-do people over 60. But for most people, Consumer Reports has long recommended term life as the simplest, least-expensive option.

Do I Qualify for Coverage?

You can buy term life insurance in your 50s and 60s, but premiums will be higher than if you were younger. Don't automatically assume you're uninsurable if you're in less-than-perfect health. "If you had any breast cancer in 1990, you were uninsurable until after you survived 10 years," says Byron Udell, CEO of Accuquote.com, an Internet life insurance broker. Now, he says, if the cancer was treated and your prognosis is good a year later, insurers will cover you.

A 60-year-old man with cardiovascular disease can be insurable at or near the so-called standard rate six to 12 months after a mild heart attack or angioplasty with no subsequent heart attack. He could get a 20-year term, fixed-premium policy with a $500,000 death benefit for about $6,500 a year, Udell says. If you've had a severe heart attack, though, you probably won't be able to obtain coverage.

Whatever your health, make sure you get in shape and get a physical from your family doctor before you apply for insurance so you won't be unpleasantly surprised. If you're overweight, shed the extra pounds. And do whatever else your doctor recommends to get your stats in line.

Better yet, get serious about your health and move up to a better risk class. When we analyzed the savings possible from 12 lifestyle changes, we found that one of the biggest premium reducers is to quit smoking cigarettes. Have high blood pressure or high cholesterol? If you faithfully take your medicines to bring those down to normal levels, you could knock off tens of thousands from your premiums over the life of the policy.

Where to Get the Best Price?

Shop for the lowest rates using an online broker with ties to many insurers, not just a few. Accuquote.com, Selectquote.com, and FindMyInsurance.com let you search for quotes on term life policies, while LifeInsure.com brokers term and permanent life. But quotes from Internet brokers are estimates; premiums are ultimately determined after a detailed application and medical examination.

You can apply for insurance online, but state law requires at least telephone contact with one of the Web site's licensed insurance agents. Before you go too far, size up how well the agent knows the underwriting quirks of various insurers. Each insurer sets its own criteria for rate classes, so some will set higher or lower premiums based on differing thresholds for, say, cholesterol levels or whether one of your parents or siblings was ever diagnosed with cancer before age 60.

How Strong Is the Insurer?

You buy insurance for peace of mind, so you don't want to worry about whether your insurance company will drop dead before you do. Look for one with the very top financial-strength rating from an independent rating agency. We recommend you stick with the "A" ratings tier at TheStreet.com, available to consumers free at www.thestreet.com/insurers/index.html, as well as the "AAAq" grade at Fitch and the "AAApi" grade at Standard & Poor's (note the "q" and "pi" designations).

In most states, guaranty associations protect death benefits for up to $300,000, and cash surrender or withdrawal value of whole life policies and annuities for up to $100,000. You can spread your risk by buying coverage within your state's guaranty association limit from separate companies—for example, a $300,000 term policy from Company A and additional policies from Companies B, C, etc. The added safety of multiple policies, however, might cost you a higher combined premium than you would pay with a single policy.

This article appeared in Consumer Reports Money Adviser.

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