Consumer Smarts: Life insurance can buy peace of mind

By PHUONG CAT LE
Buying life insurance is about as thrilling as getting a root canal. Who wants to dwell on what might happen should you die too soon?

File this task in the dreaded-but-necessary category of things you need to do in life, but don't ignore it, especially if family members rely on you for financial support. Life insurance can provide you with incredible peace of mind knowing your debts, expenses and survivors will be taken care of in the event of your untimely death.

Q: What should I know about buying life insurance?

A: Decide what you want, how much you need and what you can afford to pay. Shop around and compare rates; with rates for term life dropping significantly in the past decade, it's a competitive market. Get at least several quotes, and check the financial strength of the company. Read your policy carefully and never buy one you don't understand. Don't cancel or let your old coverage expire until your new policy takes effect.

In Washington, the law gives you a 10-day "free look period" when you buy life insurance. If you change your mind and return the insurance policy during those 10 days, the company must give you back your premium within 30 days. Just be sure to get a dated receipt from the post office or the agent.

One of the biggest mistakes consumers make is buying life insurance when they don't need it, and not buying it when they do need it, said Robert Hunter, director of insurance for Consumer Federation of America.

"The only time you absolutely have to buy life insurance is when you have a dependent relying on your income stream," Hunter said.

You don't need life insurance if you're single, unless you have a sibling or parent depending on you financially. If you're married without children, consider whether each of you would be OK alone if the other person dies. If the answer is yes, you still don't need it, he said. If the answer is no, then you may need it.

Most people should buy life insurance when they have a child, he said.

There are two basic types of insurance: term and cash value (permanent). Term pays the face amount of the policy if you die during a specific period, usually one to 30 years.

Cash value -- such as whole life, variable life and universal life -- provides lifelong protection with a savings component; it builds up cash value on a tax-deferred basis. You usually can cash in or borrow against the policy.

According to Consumer Reports, cash-value insurance can provide both estate-planning and tax advantages for well-to-do people over 60. But most 20- to 50-year-olds should stick to a term-life policy because it's the simplest, least expensive way to protect yourself.

Cash-value policies also carry high fees and commissions, Hunter said.

"The only time it may make sense is if you've got some money, and you're talking about estate planning. A rule of thumb is if you don't have a fee-only (financial) planner, you don't need it," he added.

Rates on term-life policies have been dropping in the past decade, making it much cheaper for someone in good health to buy. A $500,000, 20-year guaranteed policy for a 35-year-old male nonsmoker in excellent health costs between $350 and $520 a year, according to an online quote check with Term4Sale.com. The same policy for a 40-year-old woman in average health may be about twice that cost.

Of course, online quotes only offer a guideline. The actual policy and premium will depend on your medical exam and other factors.

Hunter recommends getting a guaranteed renewable policy, so you have the right to extend it, even if you become sick in the meantime.

"It's important for people to evaluate what their insurance needs are," said Karl Newman, president of the NW Insurance Council, a nonprofit organization.

How much should you buy? Hunter recommends about five to 10 times your annual income. Ask yourself: How much income do I provide? If I were to die early, how would my family get by? Do I want to set aside money to help my kids through college, or cover final expenses and debts? Do I want to leave money to family or charities? Don't forget to factor in any group insurance where you work and Social Security or pension plan survivor benefits.