The simplest reason to get life insurance is to make sure your loved ones have enough money to pay the bills and cover important expenses if you were to meet with an untimely end, as they say. Here's how it works: You purchase a policy for a certain amount of coverage and pay a premium every month. In the event that you pass away, the insurance company will pay a death benefit in the amount of coverage you selected, which your family can then live on. At the very least, you're aiming to replace your income for some years—until your kids, spouse or dependent relatives can fend for themselves, or until, say, your spouse can tap into retirement savings (usually at age 65). The trick is figuring out the amount of coverage that will work best for you.
Coverage is largely based on your income. A common rule of thumb is to get a policy worth 7 to 10 times your income. If one of you is a stay-at-home spouse, your policy should cover the cost of hiring people to run the household until retirement funds kick in or the kids are on their own.
But you may want to replace more than just your income, cautions Steven Weisbart, an economist with the Insurance Information Institute (III). Once you die, your family may incur medical or funeral expenses. You may want to ensure that your kids' college bills can be covered or that the mortgage can be paid in full (to give your survivors that extra security). Then again, you don't want to pay for more coverage than you need, Weisbart says: "Estimate what resources your family might have without life insurance—like emergency savings or Social Security survivor benefits—and weigh that against ongoing and new expenses. Then buy life insurance to close the gap." To help you figure out how much you need, use the life insurance calculator at Kiplinger.com.
All life insurance policies are not the same. You probably don't need so-called permanent life insurance—which falls into three categories: whole, universal or variable life insurance. These policies, which require you to pay a premium throughout your entire life, provide a death benefit if something were to happen to you, but they're meant to double as a way to accumulate savings or make investments. Until you (or your spouse) die, you can cash out the policy, or borrow against it in some cases. But permanent insurance is expensive; between the premiums and the underlying fees, it's not always a good deal, says Galia Gichon, a financial expert in New York City.
In most cases, all you need is a level term policy, which works just like home or auto insurance. You pay a flat amount each month, for a specific term that you choose: 10, 15, 20 years (based on how long you want to protect your family—until your kids are out of college and working, for example). At the end of the term, your coverage is over and you stop making payments. A healthy 45-year-old woman would pay about $600 a year for a 10-year term policy with a $500,000 benefit—about $50 a month, or less than $2 a day.
The younger and healthier you are, the cheaper the policy— but don't let that deter you. When you sign up for a policy, the insurance company will likely send a qualified medical person to conduct a 30-minute physical, Weisbart says. The amount you'll pay as a premium will be based on your medical exam, as well as your age, medical records, family medical history and other factors.
But even if you have a pre-existing condition or are older, don't assume your premiums will skyrocket, says Weisbart. "Medical advances have made many conditions manageable, even cancer. If you have a preexisting condition, shop around to see which company offers the best deal for you." But don't use the Internet, he says; it won't address the nuances of your situation. "Call an agent or broker who has experience dealing with pre-existing conditions, ask what companies they work with and whether they have experience working with people in your situation. They may even be able to negotiate on your behalf," he says.
Start with your employer, who may offer a group policy at a low rate. Many companies offer some form of life insurance, so look there first since it may be your cheapest option. Cheaper doesn't necessarily mean better, of course; you still need to make sure you're getting the coverage you need. You can also buy a life insurance policy through an agent or from a company directly. Consumer Reports recommends getting free estimates online at AccuQuote.com or SelectQuote.com—these figures can help you as you comparison-shop. As long as you get a policy from a company with a solid rating (check with rating agencies A.M. Best, Fitch or Standard & Poor's online) at a price you can afford, it doesn't matter whether you get coverage through your local agent, employer or elsewhere, say experts.
Don't buy life insurance for your kids. As with adults, permanent or whole life policies are expensive; you'd do better to set up a traditional savings or investment account for your children. As for a term policy, Weisbart advises that "unless your child is a major income provider" (think Justin Bieber!) and the family depends on the child's earnings, it's not worth it.
If you already have life insurance, it may need an update. You're likely thinking, "That's been taken care of—I don't need to think about it." But that's not always the case. If you've gotten divorced or remarried, you'll probably need to change your policy and name a new beneficiary. (Making a change to a term policy is not hard to do: Just contact the insurance provider.) If you've purchased a more expensive home since you took out the policy or refinanced in recent years and are carrying a bigger mortgage, you may need a new policy with more coverage. Or, if an aging parent has come to live with you and now depends on your support, you may want a bigger policy to cover his or her needs if you were to die. Again, the idea isn't to provide a Paris Hilton– like lifestyle for your family, but to cover foreseeable needs (say, if your parent would need help covering nursing home costs once you were gone).
Other reasons you might want to update your policy: If one of your children is no longer depending on your income, if you've recently downsized or if your savings cushion has grown, maybe it's time to scale back on the amount of coverage you need. If you're not sure, consult with a financial planner (Napfa.org is a good source of fee-only planners, i.e., folks who are not affiliated with a product that they're trying to sell).
The One Document You Need In Case You Get Sick
A living will—sometimes called a declaration or an advanced healthcare directive—governs your end-of-life wishes, and you should draw it up while you're healthy.
The document gives you the right to accept or refuse certain end-of-life care like artificial respiration, hydration and nourishment should you become ill. "If you don't want your life prolonged in this way, state that in your declaration," says Liza Hanks, a lawyer at Finch Montgomery Wright in Palo Alto, California. This is different from a Do Not Resuscitate (DN R) order, a form a doctor may provide to elderly and terminally ill patients to prevent the use of CPR in an emergency.
However, even when your wishes are stated, things can go awry in a crisis, so experts recommend that you also name someone who can advocate on your behalf, a person who can be your healthcare proxy or agent. The key is choosing someone who's available (or able to jump on a plane at a moment's notice), trustworthy and unwavering in a crisis.
In most states, you'll set up your living will in tandem with naming your healthcare agent. The document used to designate this person is called a durable healthcare power of attorney, and is easy to set up, says Hanks. You don't need a lawyer for this or your living will. In many cases, you can get the necessary forms from your HMO, from a senior center or from a state medical association—or WillMaker software. In some states, the papers may need to be notarized or witnessed.
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