Life insurance help?

February 28, 2009 6:35 AM

It's time for me to look into purchasing a life insurance policy.

I was married about a year and a half ago, and my wife and I are expecting our first child in a little less than a month. So you can imagine I've got my mind on an insurance policy in the event of my death or serious injury; they would need to be taken care of.

Can someone give me some research pointers? What's a good basic policy I can get now and perhaps augment in the future? And what pitfalls should I avoid? (Difficulty level: I'm an American living and working in Japan. My wife is currently unemployed, natch because of the pregnancy, and likely won't be working for a year or so.)

posted by zardoz to work & money (7 comments total)

I am not your insurance agent, and my memories on this are pretty dim right now, but the two main kinds are term life and whole life.

Term life: CHEAP. If you buy for example a 20-year, $500k term life policy, it means that if you die within those 20 years, your family will get the $500k. Usually in the US, these proceeds are tax free, I believe. If you die after the end of the policy, i.e. in year 21, without renewing, they get nothing. It sounds like a bad deal but you can get more coverage per dollar than with whole life, so it's a way of protecting without spending huge premiums.

Whole life: More expensive. If you buy a whole life $500k policy, your family gets the $500k whenever you die (again, I believe, income tax-free). Each $1 of coverage on a whole life policy is much more expensive than term. On the flipside, you can borrow against your accrued equity in a whole life policy. So, if you have been paying premiums for 10 years, whatever the net total of premiums equates to, you could borrow that amount against the policy. It would reduce the payout to your family upon your death, but can serve as an emergency fund if, for example, you become DISABLED but do not die.

You can do various levels of combinations of term and whole. You can do increasing term, where the amount is small now, but gets larger later, if you anticipate needs will increase over time. If you had older children, you might do decreasing term, set that the policy amount (and thus your premiums) decrease when, say, your youngest child turns 25 and thus won't be expected to need significant financial support upon your death.

Note that a life insurance policy will NOT cover your for "serious injury and death," but only for death. If you want to be covered for serious injury, you need a disability policy. Or, on the other hand, if you choose whole life, there is the option to borrow against your accrued equity in the policy (but, if you were to become disabled early in the policy life, that equity would be little to nothing).

When evaluating different companies policies, take into account their financial security. Use AM Best as one resource - registration required but free. It evaluates insurance companies for long term claims-paying ability, and the site includes a section where they explain what the ratings mean. Take it with a grain of salt, however - it is independent from the companies but reports based on the public information that they provide, for example to the SEC and NAIC.

NAIC (National Association of Insurance Commissioners) is a good US-based source of information and pointers.

You should be able to find calculators online, such as this one from BankRate, to help you figure out how much insurance you need. I would do some of those, think about them, and have them in hand when you sit down with an insurance agent.

Whether you need a Japan-licensed or US-based entity is something an insurance agent will need to help you with, but should not be a big problem. Also, you want to think about your wife's future earning capacity and how that will affect your needs, taking into account that if you die young (and you probably wont), she may have to stop working to care for the child/children.

Good luck: this is a wise decision.
posted by bunnycup at 7:15 AM on February 28 [7 favorites has favorites]

And please permit me to add:

DO shop rates across well-rated companies once you have selected a particular policy type.
DO look for an insurance agent that is appointed with multiple companies, not just an Allstate agent or a New York Life agent - one who can help you with the rate shopping process.
DO get a physical - typically the no-physical policies are simply much more expensive if you are young, in general good health and especially if you are a non-smoker

DO NOT lie on your application - if they find out about it, oftentimes your policy is cancelled and premiums forfeited
DO NOT just call an 800 number you see on TV
posted by bunnycup at 7:30 AM on February 28

Bunnycup describes the types of insurance very well. Whole life or lniversal life policies are typically combinations of retirement vehicles and insurance. They don't do either thing as well in terms of cost as separate investments in a mutual fund (lower fees to invest than in a life insurance policy) and a term life policy. I'm not an insurance agent. Term life and a long term disability policy will be better buys for insurance coverage than whole life policies generally.

If I remember correctly the general metric is to buy about 6 times your annual salary in insurance but you need to think about what you're aiming to accomplish with it - are you aiming to support your wife so she doesn't need to work if you die? Put your kid all the way through college? Pay off a house?

and congratulations on the coming baby!
posted by leslies at 8:15 AM on February 28

I dont know what you do but if you belong to a professional association they often have arrangements with insurers for their members at preferential rates.
posted by canoehead at 10:30 AM on February 28

IANAIA, either.
Assuming that you are being smart about retirement savings, you should buy term insurance. Figure out exactly what financial needs you want the insurance to cover, keeping in mind all other resources your family may have in the case of your demise. Then, put that on a time line. For example:
--paying off a mortgage would show the declining balance over the term of the mortgage
--providing for college education would show the present value (and how that grows) of the anticipated expense 18-22 years from now.
--add college cost for any future planned offspring
--add present value of any living expenses you want to cover for your spouse
Notice that a lot of these costs go away over time, which is why term makes so much sense. By the time you plan to retire, at whatever age that may be, you'll need no insurance at all because your retirement fund will be sufficient to cover the rest of your family's needs.

So, for example, if you are now, say, 30 years old, you may want to buy a $500K 20-year term insurance policy, plus a $250K 30-year policy. (Which is about the max term length you can buy.) For the first 20 years, you have the $750K to cover all needs. After 20 years, coverage drops to $250K, which might be enough to cover the potential need during that period, given that your mortgage would be paid off and your non-insurance financial assets will have grown.

In general, make your estimates on the high side to cover all possibilities including inflation. If you buy 2 or more separate term policies, with various term lengths, you can always drop one somewhere along the way if you determine you've just got more insurance than necessary, or you win the lottery, or something. But your ability to buy more insurance along the way, should you decide its needed, might be hampered by changes in your health, so buy what you really need now.
posted by beagle at 10:36 AM on February 28

I strongly recommend term insurance over whole life, universal or whatever other gimmicky name they have invented lately. You will have to steel yourself because the insurance salesmen have learned every trick in the book to convince you that that whole/universal life is a better deal. And it certainly is -- for the insurance salesman -- who receives enormous commissions for selling it. The salesman has detailed manuals and they go to annual seminars learning the techniques to manipulate you into buying the expensive product. They will outright lie to you about it. No matter what, just say no.

Term life insurance is just that, life insurance. The others are touted as investment vehicles but are burdened by high commissions, high fees and poor returns. They may be appropriate for a tiny percentage of very wealthy individuals.

Term insurance guarantees a fixed monthly premium, typically for a term of 20 or 30 years. The longer term will have a higher premium so one possibility is to buy half for 20 years and half for 30 years. The presumption is that your need for life insurance will decline as you get older, have less debt and the kids become adults.

The younger you purchase the insurance the cheaper it is because risk to the insurance company increases with age. Also, if you wait, some medical condition could arise that prevents you from getting insurance or greatly increases the cost. Examples are high blood pressure, diabetes, cancer, cardiovascular disease. You want to lock in a low rate before that happens.

When you look for an agent, look for the CLU certification, Chartered Life Underwriter. This certification ensures that the agent has receiving training in life insurance.
posted by JackFlash at 11:56 AM on February 28 [1 favorite has favorites]

There are lots of other threads that discuss Life Insurance. Here's a long explanation that I wrote of the types of insurance available and how to assess your needs.
posted by PandemicSoul at 12:44 PM on March 2