1. How Much
“truly is an art as well as a strategy to calculate how
.
science,” says Tim Maurer, much coverage to buy and
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a financial planner in Hunt to form a plan that’s easy to
Life Insurance
Valley, Md., and coauthor update. The idea is to assess
of The Financial Crossroads U
whether you need extra
(Companion, $25). IB
coverage or different poli-
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cies only after you project
Do You Need? IS
A simple strategy. The pur- your life-insurance needs as
pose of life insurance is to D
the sum of four categories.
allow your family members R expenses. A funeral,
Use our formula to cut through the confusion. to pay the bills and live their
lives as planned despite your FO burial and related expenses
Final
By KimBerly lanKford T
absence. That’s why some
O tend to cost $10,000 to
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experts and most online $20,000. Your beneficiaries
unpredictable investment
and job markets are rough
no mortgage and a substan-
tial retirement fund. L Y
calculators sponsored by
the insurance industry seek
may be able to get the tax-
free proceeds from insur-
on savings and retirement Low inflation and a re- N
to figure the chunk of in- ance faster than if they
planning. They also compli- covering stock market may O
vestment capital it would waited for money from your
cate the issue of how much tempt you to low-ball your G
take to replace all of your estate. Use $15,000 as a ball-
life insurance is right for life-insurance needs. But IN
income for 20 years or lon- park number.
you and your family and
what kind you should buy.
other financial realities,
such as puny yields on rein- E AD
ger, held securely in Trea-
sury or municipal bonds Mortgages and other debts.
Standard formulas—such vested lump-sum benefits, R and certificates of deposit. Total your mortgage bal-
as buying coverage equal may require that you have
AL With savings yields low and ance, car loans, student loans
to eight to ten times your N
more coverage, not less. And the prospect of longer life and any other debts that
annual income—are inade- O
you’ll likely experience life
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expectancies in retirement, would be a heavy burden on
ER
quate shortcuts. Online cal- events that call for changes this approach tends to aim your survivors. They may
culators are apt to tell you in your insurance: marriage, high, especially if you as- choose not to retire the mort-
to raise your coverage by P
parenthood, homeowner- sume raises and promotions. gage, especially if the inter-
$1 million even if you already R
ship, college expenses and “You can find people who est rate is low, but the money
have insurance. The truth is
FO
retirement. Instead of rely- are extremely minimalist should be available so that
PY
that life insurance is a per- ing on rules of thumb, you’re with insurance recommen- they won’t face the prospect
sonal affair. Two couples better off taking a system- dations,” says Maurer. “But of being forced to sell.
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may earn equal salaries, but atic approach to figuring I see an overabundance of
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it’s silly to say that someone your life-insurance needs. people who end up justify- Education expenses. This
T ED
with four young children
should have the same cover-
That’s easier than it sounds,
as you’ll see from the fol-
ing more insurance than I
think is reasonable.”
calculation can be tricky
because you need to con-
IN
age as empty nesters with lowing process, because it Instead, he offers a simple sider the cost of college
PR
You nEED MoRE liFE insuRAnCE iF You...
Tie the Knot Have a Child Buy Your Dream House Are About to Retire
Your new spouse might depend It takes a lot of money to raise When you settle into your family’s No more insurance from work. If you
on you even if he or she earns a child—and it doesn’t get any permanent home, guard against die, your spouse could lose pension
as much or more than you do. cheaper if you’re not around. its loss in case tragedy strikes. and some Social Security income.
08/2010 Kiplinger’s personal Finance

2. » MONEY // INSURANCE
at the time your kids enroll. even $250,000. If you’re the of thousands of dollars sents dozens of life insurers.
But Maurer devised a sim- one with the medical condi- should cost just a few hun- Women pay less—just $311
ple solution. College costs tion, you’ll find it tough to dred dollars a year. per year for $500,000 in
have been rising by about buy additional coverage later For example, a healthy coverage and $558 for
5% a year, which is the same at a price you can afford. 40-year-old male nonsmoker $1 million. It’s not as easy
rate he conservatively ex- For most families, this might be considering a 20- as it used to be to qualify
pects life-insurance pro- exercise will work out to year, $500,000 term policy for the absolute lowest
ceeds to grow over time. an amount in the high for $360 per year. But he rates. You can get prices
He recommends looking six-figures, possibly even could buy $850,000 of from dozens of companies
up current costs for colleges $1 million or more. But don’t coverage for $576, or a at www.accuquote.com or .
you’re considering, deciding be frightened. With term $1-million policy for $645, www.lifequotes.com. N
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whether you want the in- insurance, boosting your says Byron Udell, owner of
surance to cover all or a death benefit by hundreds AccuQuote, which repre-
U
The time factor. Also consider
portion of the tab, and add-
IB
how many years you’ll need
TR
ing the amount in today’s insurance. If you’re in fine
dollars to your life-insur- * Term vs. permanent physical shape, you can buy
IS
ance calculation.
GET THE BEST OF BOTH a new policy and lock in the
D
price for 20 years. Because
R
income replacement. Once
you cover funeral expenses,
TERM INSURANCE IS POPULAR BECAUSE ALMOST EVERYONE CAN
afford plenty of it. Some young people buy the amount of perma- F
O prices for term have been
dropping steadily, you may
debts and education, your nent insurance that fits their budget, rather than the protection T not pay much more to ex-
family won’t need to replace they need. That’s not smart. O tend your coverage if you
But it can make sense to combine term and permanentN
Y.
100% of your income—and insurance reshop in, say, five years.
that’s where the art part Some term policies come
L
with multiple policies or by buying a convertible-term policy and
of the calculation comes in.
Maurer recommends cover- convertible-term policy is that insurers don’t O
N a new medical
making a series of conversions over the years. One advantage of a
require
with the right to convert to
permanent life insurance,
ing 50% of current pretax
G
exam when you make the conversions. That essentially gives you a which you can keep for the
earnings until retirement.
IN
pass if you gain weight, develop high blood pressure or even survive rest of your life regardless
AD
You can translate this into a a bout with cancer. of health. Premiums will be
target lump-sum benefit by higher than for term at the
E
Northwestern Mutual Life provided this example for a 27-year-
dividing it by 0.05. For exam-
Rit to whole life $100,000 at a time. If you
old man who starts by paying $317 for $500,000 of term insurance, beginning, but they usually
AL
ple, if you earn $100,000, and then gradually converts remain level indefinitely.
divide $50,000 by 0.05, shift $100,000 to whole-life at age 28, your annual premium would The best reason to consider
which works out to $1 mil- jump to $1,300. IfN shift another $100,000 at age 31, your pre- whole-life or universal-life
lion. That assumes the insur- S O you
mium would rise to $2,600. Your premium would gradually increase insurance isn’t the accu-
ance benefits will earn 5% R
whenever you shift money to the whole-life policy, topping out at mulating cash value, al-
$7,200E age 40, for the entire $500,000 of whole-life insurance.
a year over the long haul,
P at though that’s part of the
a conservative back-of-the-
R value will rise every year, as will the death benefit. By age 65,
As long as the insurer remains strong and solvent, the policy’s deal. The real issue is
FOin this example, the benefit is projected to be $990,000 and the
envelope figure. cash whether you’ll need cover-
Add all four categories age beyond 20 or 30 years—
PY
to estimate how much life cash value $475,000, which can be borrowed, withdrawn or tapped or after age 65, when term
insurance is appropriate,
O to keep the policy in force without paying additional premiums. gets expensive. You might
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then tweak the number to This kind of flexibility is attractive to Nirmal Bivek, a 32-year-old want permanent insurance,
ED
reflect personal circum- banker in Atlanta, who bought slightly more than $1 million in life- for example, if you need to
stances. You might increase insurance coverage when his 3-year-old daughter, Sarina, was born. protect kids with special
T
IN
it if you don’t have a pen- Bivek has already converted some of the coverage to whole life and needs who will always rely
sion, but you could decrease on you (or your estate) for
PR
expects to convert more of it as his income grows.
your coverage if your spouse He added more insurance when he and his wife, Vijal, were ex- support, or if you want to
earns a substantial salary. pecting a second child and when they bought a vacation home. “I’m leave money to a school,
If you or a family member in good health now and term is cheap,” says Bivek, “so I’m buying as charity or your children
has a troublesome medical much as I can now and converting it over time.” and you don’t expect to
history, add $100,000 or afford it any other way. I
(#21079) Reprinted with permission from the August 2010 issue of Kiplinger’s Personal Finance. © 2010 The Kiplinger Washington Editors Inc.
For more information about reprints from Kiplinger’s Personal Finance, contact PARS International Corp. at 212-221-9595.
The Northwestern Mutual Life Insurance Company, Milwaukee, WI. There are policies with guaranteed and non-guaranteed
elements. Clients should contact a financial professional to determine the type and amount of coverage that best suits their needs.
Approval for the total amount of coverage is subject to the financial and medical underwriting of the company.
53-0166 (0610)