Your Money_ The Missing Manual - J. D. Roth [115]
Tip
For more money-saving ideas, check out this advice from the Insurance Information Institute: http://tinyurl.com/homeins.
Life Insurance
In Chapter 6, you learned that your job is your second most important financial asset right after your health. Your income provides food and shelter for your family, and helps fund future plans. But what would happen to your family financially if you died? If the loss of your income would be a catastrophe for them, you need life insurance.
Tip
Life-insurance premiums have fallen dramatically over the past decade. If you bought a policy during the 1990s, it's worth checking prices again today. The August 2008 issue of Consumer Reports found the average person could save over $100 per month by "refinancing" their life insurance—buying a new, cheaper policy. If you do find cheaper insurance, don't cancel your existing policy until the new one is in place.
The two basic types of life insurance are:
Term insurance, which gives you coverage for a set period of time (the term), like 5 years, 25 years, or whatever (you can choose from different terms). As with car or home insurance, you decide how much coverage you want (more on that in a minute), and then pay an annual premium. Unless you buy level term insurance, your premiums start out small and get higher as time passes. If you die during the term, the policy's beneficiaries (usually your family) receive an income-tax-free payout.
Cash-value insurance (officially called permanent insurance), which is similar to term insurance but lasts your entire life, not just for a fixed term. Common types of cash-value insurance include whole life, variable life, and universal life. Each of these adds an investment component to the policy that accumulates a cash value, which you can borrow against, reclaim if you cancel the policy, or eventually use to pay premiums.
Cash-value insurance sounds like a better deal, right? It lasts your whole life instead of just for a few years, and the insurance company invests some of your premiums so you can use them later. Not so fast. When you purchase permanent insurance, you're most likely committing an insurance sin: buying coverage you don't need. Term life insurance is usually the best choice for a number of reasons.
First, most people don't actually need permanent life insurance. Your need for life insurance tends to fade as you grow older and your family is no longer dependant on your income. So if you take out a permanent policy, you may be paying for life insurance when you no longer need it.
Second, the investment part of a cash-value policy isn't usually a good deal. After all, you don't buy a savings account with your auto insurance policy, so why would you do so with your life insurance? Keep your insurance and investments separate. If you want to invest, there are better ways to do it. (See Chapters Chapter 12 and Chapter 13 for investing info.) Don't buy life insurance as an investment.
Lastly and most importantly, cash-value insurance is much more expensive than term—five to 20 times more expensive! You could probably buy 30 years' worth of term coverage (which is all you really need) for the same cost as buying 5 years' of a cash-value policy.
Tip
For $75, the Consumer Federation of America (http://tinyurl.com/CF-Linsurance) will evaluate a cash-value policy—one you already own or one you're thinking about buying—to find the "true" investment returns. This fee may seem high, but it's cheaper than paying for insurance you don't need.
That said, cash-value policies do make sense for some people. If you have a high income, will leave behind a multi-million-dollar estate,