Group insurance for
MSBA members

The Facts of Life

You may have several resources you count on for financial security: savings, investments, Social Security. But for most families, life insurance provides the strongest resource for financial security in the event of a death.

Yet, according to the American Council of Life Insurance, nearly half of American families don't own a life insurance policy. And many families don't have enough to keep their financial security.

To avoid this problem, consider the ways you can use life insurance to meet your financial obligations:

What Type of Life Insurance is Best?

To help in your decision, here is a summary of the most common types of life insurance and benefits:

Term Life Insurance provides protection for a specified "time period" or to a certain age. Term life is "pure" insurance, meaning it's strictly a death benefit with no frills. With Term Life coverage, normally there isn't a cash value-meaning if you outlive your time period, your protection ends with no cash payback.

Term Life is the least expensive option. The cost is generally less than other types of life insurance, especially for people under age 50. Term Life may be the best choice if you're on a tight budget or if your insurance needs are temporary-if, for example, you only need it until your youngest child leaves home.

Some Term plans are convertible, which means you can change to a Whole Life policy at some later date ... regardless of your health.

Whole Life Insurance is "permanent" insurance because it protects as long as you pay the premiums. Whole Life differs from Term because it builds cash values. You can borrow from the cash values, but this reduces benefits paid at your death.

Whole Life protection is typically more expensive than Term Life coverage. However, premiums never change, even as you grow older.

Whole Life is your best option if you want to earn steady returns on your cash value, or want part of your premium invested in a savings or investment fund. Whole Life may be a better choice if you expect to pay taxes on a large estate, need to support a handicapped child, or want to leave money to your heirs.

Universal Life Insurance is a cash value policy similar to Whole Life, but it offers more options. Part of your Universal Life premiums pay for pure insurance protection, while another portion is invested to build cash value. With Universal Life you earn market interest rates on your cash value.

Universal Life offers you more flexible premium payment options, including additional payments to build up your cash value. This allows couples to cut back on their premium payments when they buy a home, have a child, or need income for their children's college tuition. Later, when their income increases or expenses decrease, they can pay more.

Variable Life Insurance is similar to Universal Life but differs because you are in control of your investments. You have a choice of investing your cash value in a common stock fund, bond fund, or money-market fund.

If your investment increases over the amount of the interest rate, your death benefit rises. If your investments perform poorly, you may have to increase premiums to keep the policy in force.

A Whole, Universal, or Variable Life policy may be your best option if you think you'll need help financing your children's college education or want to build up retirement funds.

Besides these four basic types of life insurance, you can also buy optional policies and riders.

First-To-Die Policy covers both husband and wife and costs less than two separate policies. When the first spouse dies, the surviving spouse will receive the death benefit.

Second-To-Die Policy is the opposite of the First-To-Die Policy. Death benefits are paid after both spouses die to help cover estate taxes.

Whole Life with Family Rider combines the advantages of Whole Life and Term Life. If a spouse dies, the surviving spouse gets a lump sum death benefit from the Whole Life portion and a monthly income for a specified time from the Term Life portion.

What Features Do You Need?

Life insurance can adapt to most lifestyles and financial conditions. Compare these benefits:

How Much Do You Need?

Some financial experts recommend you have life insurance equal at least five times your annual take-home income. Other experts suggest as much as 10 times your income. However, rules of thumb may not be appropriate with every family situation.

Insurance at a level of five times your income may be too much for a retired couple with a pension and no dependent children. Young couples with small children probably need higher benefits to accompany financial responsibilities.

Finally, after you buy your life protection, you should review it again every two years or after any major life event, such as marriage, divorce, birth or the purchase of a home. These changes could affect the amount and type of life protection you and your family need.

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How much life insurance should you have?

Striking a balance between having too little and too much insurance coverage can be confusing-but a few simple calculations should simplify your decision.

1. Determine how much your family needs to continue living the way they do now. Add:

- Living expenses, such as food, clothes, rent or mortgage, taxes, utilities,
entertainment.
- Anticipated child care if one parent dies.
- Total $__________________.

2. Add the income that you expect your household to maintain:

- Income of surviving spouse.
- Social Security benefits.
- Total $___________________.

3. Subtract #2 from #1 to identify any income shortfall: $___________________.

4. Determine your family's debts and expenses. Add:

- Outstanding debts, such as car loans, credit card balances, etc.
- Expenses for funeral and burial.
- Any medical expenses not covered by insurance.
- Children's college fund.
- Total $___________________.

5. Multiply income shortfall (#3) by ten years: $___________________.

6. Add #4 and #5 to determine your total of current and future expenses: $_____________.

7. Identify sources of other income for your family members. Add:

- Existing life insurance.
- Assets that produce income, such as rental properties, stocks and bonds.
- Cash and savings accounts.
- Social Security benefits (onetime standard benefit of $255).
- Total: $___________________.

8. Subtract #7 from #6 to determine your insurance need.

- Last Updated 9/28/03 -