FROM THE NEW YORK TIMES
How Much Is Enough In Insuring a Life?
REPRINTED
WITH PERMISSION
SATURDAY, SEPTEMBER 23, 2006
If you died today, would your family be destitute in a few years, comfortable, or toasting your good planning as they vacationed on the Riviera? It largely depends, of course, on your
investments and how much life insurance you’ve bought.
Figuring out how much life insurance
you need can be difficult, and the appropriate amount varies by situation: marital
status, number of dependents, earning potential of each spouse and whether both
work. Many financial advisers, nonetheless, maintain that correct coverage is
crucial to a successful financial plan.
Overinsure, and good money is wasted on the unlikely event of a premature death. Underinsure, and a family may have to lower its lifestyle at an already
traumatic time, a newly single stay-athome parent might have to return to work, a house might have to be sold in a bad market or children attending college might have to drop out.
Gina Belsanti Cleary, 35, started thinking hard about the subject in 2004, when
her second child was born and she was starting a residential mortgage company in LaGrange, Ill.
Because she is the family’s primary earner, she took out $900,000 in life insurance on herself and $600,000 on her husband, Matthew, 44, a construction worker. “I thought,
What would happen if I died today?’’ Mrs. Cleary said. “I took myself
out of the picture, and what I saw was not very good. I saw my family suffering emotionally and financially. If I can prevent the financial part, hopefully the emotional
part won’t be so heavy.” She said she wanted
enough coverage so her husband could stay home with their two children until they were in school, pay off the mortgage, clear debts, invest money for college and finance the daughter’s wedding. She said their $1.5 million term insurance policies cost about $100 a month. “This is one trip to Walgreen’s and one
dinner out to eat for the four of us,” she said.
The life insurance industry’s rule of
thumb is 10 times annual salary for an individual. But consultants and various online
life insurance calculators try to provide more specific estimates. The Life and Health Insurance Foundation for Education, a nonprofit group financed by the insurance industry, has a calculator at
http://www.life-line.org/. Insurance aggregators, like insweb.com and insure.com, offer calculators to figure life insurance needs as do
insurance companies, banks and investment companies.
The goal is for people to withdraw less
annually than their investment portfolio returns. This allows for inflation if the
money is to support them for long periods. Many advisers recommend an annual
withdrawal of 5 percent or less, which would be $50,000 in annual taxable income
on $1 million. “And 5 percent may even be on the high
side if you have to pay someone to manage your finances,” said David Barkhausen, a
fee-only life insurance consultant in Lake Bluff, Ill., and president of Life Insurance
Advisors Inc. Robert Hunter, director of insurance for the Consumer Federation of America,
said 10-times-earnings is a good rule of thumb.
“You want to make sure a child is protected,”
he said. “That’s a considerable amount of money when you consider education,
food, housing, vacations. The nice pArt of it is that once your child begins to
grow up and graduates from college, you
can buy less life insurance.”
There are two basic varieties of life insurance. Term insurance, which covers
a set period of time, is cheaper. Permanent insurance, which includes whole life
and universal life, does not expire and is often used by wealthier individuals to pay estate taxes.
Young people in excellent health should
not automatically buy extra life insurance through their employers, specialists
say, because it can be more expensive than what they could obtain on their own
unless they get it at a group discount rate.
Conversely, older people, those in poor
health or those looking for a convenient way to buy life insurance could benefit
from employer plans, they say. Dr. Alexander Sudarshan, an eye surgeon
from Los Fresnos, Tex., has $4.8
million in life insurance — $1.6 million in whole life and the rest in term. The idea is
that his wife and three adolescent sons would live off the interest were he to die
unexpectedly. To calculate his needs, he
hired Peter Katt, a national fee-only life insurance consultant from Mattawan,
Wis., who charges $325 an hour.
“There is no room for error,” said Dr. Sudarshan, 47. “Life insurance calculators
are sufficiently complicated. I was a
math major at Yale. They are complicated
enough that you really need somebody who really understands.”
Many advisers recommend term insurance over permanent. Term insurance costs a fraction of permanent insurance like whole life (with a locked-in premium) or universal life (where the premium vary based on projected interest rates). Term rates tend to be constant for
the life of the policy — 5 to 30 years — but coverage is like a lease: it expires when the policy does. When their term insurance
expires, people who are in ill health or are otherwise considered a bad risk
may finds themselves uninsurable or facing prohibitively higher premiums.
One compromise is converting term insurance
to a permanent policy at preset points, allowing coverage to continue but at higher rates. Permanent insurance should not expire and it sometimes is used as a savings tool because it accumulates cash value. If policies are surrendered within a short period of time, however,
policyholders may receive little of their investment.
Harold Evensky, an independent financial planner with Evensky & Katz in
Coral Gables, Fla., does not sell insurance
but views it as a risk management
tool. He said correct insurance coverage was one of the most important aspects of financial planning. “Once you have the right coverage, then you can talk about investing somewhere
else,” he said. The American Council of Life Insurers,
a trade group, said 35 percent of households had no life insurance. One was the
Diss family of Tampa.
Laura Diss was attending Florida State
University when her father, Mark Diss, died of an aneurysm last year. A freelance
writer, 52, he was paying for his daughter’s education but had no insurance. When he
died, Ms. Diss had to drop out of college and get a job. Now 20 and a junior at
Wellesley College, she receives financial
aid and scholarships, works about 20 hours a week and has summer jobs.
“His philosophy tended to be that if he
could spend the money on doing something
with us right now, he’d rather do that than something long term,” she
said. “Insurance is something that you don’t ever want to have to use, but it’s
really not about you. It’s for those people
who are going to be there if something happens to you.”
Kirsten Izatt, an estate planner in Wheaton, Ill., says women are more motivated
than their husbands to do estate planning because they better understand
day-to-day costs that would become their
responsibility if their husbands died.
Men, she said, often believe they could support their families without a wife. Neal Rhoney, an Atlanta-based financial
adviser with Ameriprise Financial Services, said many clients presumed a surviving stay-at-home parent would work if the breadwinner were to die.
“It’s like ‘Oh, you’re a single parent, and now you’re going back to work full
time?’ You have to pay someone to care for your kids,” he said. He recommends that stay-at-home parents have 30 percent to 50 percent of the insurance carried
by the working parent. “If the working
parent is not able to focus on their income
and instead they have to constantly take time off to chauffeur kids around, there is
a big drain on that parent’s ability to earn an income.”
When Jennifer and Stephen Goldstein
first heard estimates that they needed life insurance worth 8 to 10 times annual
salary, they thought it was excessive. She
works in Pfizer’s licensing and development department. He is a business development
and marketing executive. But after running the numbers, and having
their first child in May, the Manhattan
couple realized the estimate was on target.
“When you factor in everything — like you might send your kid to a $14,000 private
school and a $25,000 nanny and the mortgage and what you’ll pay for college
— we did end up back with that,” Mrs. Goldstein said.
This document is for informational purposes only and is owned and maintained by a third party. Neither Farmers New World Life
Insurance Company® nor its information providers warrant the accuracy or completeness of such information. You should consult
your attorney, accountant or tax adviser for legal or tax advice.
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