Q: I'm a 56 year-old single parent with a 13-year old daughter. I was recently laid-off, and my life insurance through my job expires 31 days after termination. I have the opportunity to convert the policy to individual coverage. I have my house and my 401(k) as investments. Am I right in thinking that I don't need this life insurance? -- AB via email
A: As the single parent of a minor child, you do need life insurance -- not as not an investment for yourself, but as an emergency fund for her. It's the best way to make sure that if you're hit by a bus next week, there will be money to finish raising her and pay for her education.
For a parent who needs a policy to replace his or her income in the event of premature death, it makes sense to buy the biggest possible amount of coverage for the smallest possible premium. That would be term insurance. And I have good news for you: This is the only type of life insurance that's simple and easy to understand!
A term policy is cheap because it has no savings or investment component. It's like fire insurance: You pay the premium every year; and if you die, the policy pays your beneficiary. If you don't die, it pays nothing.
For young people, term insurance has always been much less expensive than cash value life insurance. (With cash value coverage like whole life, variable life, and universal life, your premium must fund an investment account in addition to insuring you.) But even for people in their 50s and 60s, the cost of term insurance has fallen substantially over the past couple of decades, for two reasons. One is that people are living longer. The other is that medical technology makes it easier for insurers to predict life expectancy. The result: Insurers can lower their prices because it's a good bet that you'll outlive your policy.
The standard term policy is level-premium term, on which you pay a fixed annual premium for the duration of coverage, which can be 10, 15, 20, or even 30 years. You should comparison-shop for a policy that lasts until your daughter will be self-supporting -- perhaps a 15-year term policy.
Okay -- so what about your employer-paid coverage? You can convert it to an individual policy without undergoing a physical exam. But if you're healthy, you can almost certainly find a bigger policy for substantially less money elsewhere. (Employers typically offer a policy for one and a half to two times your salary, but only up to a dollar limit that's often quite low.)
People often mistakenly assume that group life insurance is less expensive than an individual policy. But unlike the premiums for a level term individual policy, the premiums for group coverage rise every few years. And because group coverage is guaranteed to all employees, it's priced to cover people in poor health. If you're in good health, an individual term policy may be a far better deal -- especially if you're a woman in a state that requires unisex rating in group policies, says Mark Cortazzo, senior partner at Macro Consulting Group, a Parsipanny, New Jersey financial adviser. (A woman's life expectancy on average is longer than a man's; so with gender-based rating, she pays less for the same amount of coverage.)
You can easily comparison shop for term insurance online at sites like AccuQuote and Term4Sale. These firms earn a commission if you buy a policy from them; but the quotes are free. You can also get quotes on the telephone directly from highly-rated, low-cost insurers like USAA Life Insurance Co. (800 531 8722), and Ameritas Life Insurance (800 745 6665). In all cases, the preliminary quote won't be final until you've had a medical examination. Any reputable life insurer will make an appointment for you to have the underwriting examination free of charge; if you prefer, this can be done at your home or office.
Please send your questions to Lynn@LynnBrennersFamilyFinance.com. I'm sorry I can't respond personally to every email. Questions are only addressed online.
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