Matt Krantz, USA TODAY
Few people get a shopper's high buying toilet paper, motor oil and toothbrushes. But perusing the aisles hunting down these items is like a shopper's paradise next to buying life insurance for most.
Life insurance ranks at the top of the list of things consumers know they probably should buy, but get no personal enjoyment from whatsoever. There's just no happy way to look at life insurance. In the best-case scenario, life insurance is just another bill to pay. And in the worst case, your family collects the benefits, but unfortunately you're dead.
But while life insurance isn't all that much fun to buy, much less talk about, it's a critical part of many people's financial plans. A life insurance policy is a pact between you and the insurance company. As long as you pay the bill, or premium, the company will be there to pay a death benefit to your beneficiaries if you pass away, giving them cash to get by.
The piece of mind consumers can get from owning a life insurance policy to protect their families from untimely death can be hard to quantify, but an important one nonetheless.
"In the stages of your life, right out of college to a young professional, you might have a first marriage and children come along," says Cary Guffey, financial adviser at PNC and Certified Financial Planner. "You have a need for protection."
Since insurance is something many people dread to buy, it might be tempting to just skip the whole thing. Life insurance can be especially daunting since it can get extraordinarily complicated in a hurry. Yet going without life insurance can leave your family, spouse or other dependents facing enormous bills and financial obligations with little or reduced income. Similarly, some consumers go overboard and buy too much life insurance or get involved in complicated policies that aren't appropriate for them.
Some employees might be tempted to just sign up for a life insurance policy through their employers. These plans have a death benefit that's a multiple of the worker's salary, with the employee able to buy additional coverage. Such group plans make sense for employees who might not be able to get a policy on their own due to pre-existing health issues, or want to make the process as easy and painless as possible. But these plans come with a huge downside that makes them inappropriate for many: If you leave the employer, you cannot renew. If you leave a company after working there a decade for instance, you'll need to buy your own life insurance policy. But at that point you might not be insurable, due to an health issue that arises, or you'll face higher premiums because you're older.
Understanding there's probably a dozen other things you'd like to be reading about, financial planners suggest people keep things simple when it comes to life insurance. Using your age as a basic proxy for how much life insurance you need and how you should buy it works for most. Here are the guidelines you need to know:
•The big demand years: 25 to 35. If there's a time you need life insurance the most, it's now. The list of obligations at this stage in most people's lives is a long one: mortgage, kids' college fund, car payments and retirement planning. What's more, many people at this stage in their lives are still building their assets and are far from having enough to cover costs in case of a disruption to income, Guffey says.
But there's a bright spot. If you buy a term life insurance policy, which is the best option for most, the prices are very reasonable during these years since death is, hopefully, a very remote possibility, says John Hauserman of financial planning firm RetirementQuest and a Certified Financial Planner. Term life policies are pretty straightforward. You pay a set monthly or annual premium in exchange to having a preset death benefit for a set number of years.
For instance, a 30-year-old male in good health could get a $500,000 term life policy, good for 30 years, for less than $525 a year from a reputable insurance carrier. Typically, all that's needed is a blood test and a check. The general rule of thumb is to have a enough coverage to cover all the family's debts, be it mortgage or cars, Guffey says. A case can be made to have more, though, to make up for lost income, for instance. "For young people, term insurance is a very cheap and a very cost-effective way to take away risk," Hauserman says.
•Need for life insurance wanes, but doesn't disappear: 35 to 55. Insurance still plays a role in the financial "pre-retirement years," but it's starting to get less important, Guffey says. By the time people are hitting these years, especially if they had a financial plan when they were younger, they see their liabilities shrink and their assets grow. This reduces the need for life insurance. On the liability side, mortgage balances are starting to fall as the loans have been paid on for years. Meanwhile, college savings plans and retirement plans are probably well on the way at this point. Most people in this stage in their lives, too, should have their term policies in place that they set up while they were younger.
That's not to say there's no need for life insurance in this age bracket. There are cases when consumers might add a second home, have a child or adopt children later in their careers. Some people in this stage in their lives might also need to think about providing financial security for grandchildren, Guffey says. These unique cases require protection.
•Life insurance turns into something else: 55 +. Once consumers get within 10 years of retirement, or are retired, life insurance is no longer needed for protection. The biggest financial risk is no longer death, but rather, the odds of needing constant medical attention, says Greg Dorriety of Optimum Asset Management and a Certified Financial Planner. By the time people get into their 50s and 60s, their kids are working, homes are paid for and most expenses drop. The exception to that, however, is medical costs, which are rising in many cases. It's at this point that many consumers might opt to consider skipping life insurance, and instead moving the cash toward a long-term care policy, to protect them from the costs of a prolonged period of assisted living, Dorriety says. Some insurance companies are developing life insurance policies that morph over time into long-term care policies. But these policies are relatively new and aren't as "efficient" as simply buying a long-term care policy, he says.
At this stage of life, a few consumers in very special cases might consider whole life policies. These complex life insurance contracts blend a savings and investment account with a traditional death benefit, or payment to beneficiaries on the death of the owner of the policy, Guffey says. These whole life policies require consumers to pay an annual sum, part of which goes to the life insurance policy, but allow cash to build up in an associated account that can be paid to beneficiaries shielded from tax.
But for most people, whole life policies are too complicated, fees too high and returns too low to make them the best choice even for consumers in their 50s, 60s or higher, Hauserman says. The premiums on whole life policies tend to be 10 times higher than those on term life policies. Meanwhile, the returns on the cash stored in the whole life policies tend to be low, he says. Whole life policies can make sense for people who have already contributed the maximum to their 401(k) plans, have additional cash to save, are nervous investors who tend to only buy low-yielding certificates of deposit and expect to die young, he says. "You have many hurdles to cross to get there," Hauserman says.
With the right planning and understanding of how life insurance fits into a plan, it's one of the easier things in financial planning to take care of. Not having the right life insurance "is a relatively easy thing to fix," Hauserman says.