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Ask Stacy: Is life insurance necessary?

Car, homeowners and health insurance: necessary. But what about life insurance? Here are seven things everyone should know.

By MSN Money Partner Apr 22, 2014 12:23PM

This post comes from Stacy Johnson at partner site Money Talks News.

Money Talks News on MSN MoneyThis week's reader question is about life insurance, and it’s short and sweet.

Is life insurance really necessary if you are a single person with no dependents? -- Pam
Insurance © NULL/CorbisWho needs life insurance?

Life insurance is one of the least understood major expenses. Many people buy it when they don't need it. Just as many need it and don't buy it.

You need life insurance if those depending on your income would suffer financially from your death. The most obvious example is when you have kids, debt and a one-earner household, because the death of the breadwinner would be financially tragic.

When you've paid off the house, the kids are gone, the savings account is topped off, and your death is just an excuse for your remaining friends to get together and have a drink, your need for life insurance is over.

Of course, there are those between these two extremes. For example, because Pam has no dependents, she probably doesn't need life insurance. But she may have an awesome home she wants to leave debt-free to her sister. If that home has a mortgage, she may choose to get enough insurance to pay it off.

Another situation where life insurance can come in handy is a big estate. In 2014, you can leave an estate of $5.34 million without owing any federal estate tax. Amounts above that exemption are taxed at 40 percent. Some people use life insurance to pay that tax bill.

For most of us, however, the need for life insurance is easy to gauge. Simply ask yourself who would suffer financially by your death, and how badly. If it's bad enough to justify paying premiums, start shopping.

Here's how to do it right.

1. Shop

Many sites have insurance search tools that can help you compare quotes and features. But remember that no online insurance search engine includes all companies, and many only include companies that pay to be represented. So don't expect online search tools to be either complete or completely objective.

If you're seriously shopping, more due diligence is in order. Check several search sites and beat the local bushes as well.

2. Buy term

There are two basic types of life insurance:

  • Permanent, or whole life. As the name implies, these policies offer a lifetime of coverage. They also combine a savings account and life insurance contract, allowing you to tap the savings component, known as cash value, should the need arise.
  • Term insurance. This insurance has no cash value and covers you for a specific term, from one year to 20 or more. If you die during that term, your beneficiaries get a check. If not, you're out the premiums.

Because permanent insurance will ultimately pay and features a built-in savings account, it sounds like the way to go. But most people should buy term. The reason is simple: It's cheaper. Unless you have a big estate, you don't need insurance forever. You need it when you're young, in debt and raising a family. You don't when you're older and no longer have people depending on your income.

3. Don't buy more than you need

Depending on a commissioned salesman or online calculator to determine how much life insurance you need is a bad idea.

Many calculators don't take Social Security survivor benefits into account. They might assume you want to leave enough so your spouse and children can live forever off the interest alone. Or that your kids plan to attend Harvard. Or that your mortgage balance isn't decreasing with every payment you make. Or that your spouse might go back to work.

In short, this isn't an exact science. Maybe you want to leave your survivors wealthy, or maybe you just want to leave enough to pay for your funeral. But if you leave it up to a company-sponsored calculator or commissioned salesperson, expect a big death benefit and a big premium to go with it.

Better idea? Figure out what your death would mean financially to your family and determine their needs, both short term (paying for your funeral) and long term (paying off the mortgage, college costs, etc). When you've arrived at an estimate, subtract the money you have now or can expect from Social Security or work-related policies, then cover the shortfall with insurance.

4. Stay away from commissioned salespeople

Woody Allen once said, "There are worse things in life than death. Have you ever spent an evening with an insurance salesman?"

While Allen was referring to boredom, he could have been highlighting another drawback of commissioned salespeople. Simply put, the more you buy, the more they make, so they're not objective.

But avoiding commissions doesn't mean avoiding expert help. There are plenty of fee-only planners out there who can help you evaluate your need, then steer you to low- and no-commission policies, like those from TIAA-CREF and Ameritas. Sure, you'll have to pay for the adviser's time, but you'll more than offset the cost with less expensive insurance and peace of mind.

5. Avoid guaranteed issue (if you can)

Ever see a TV commercial -- usually directed at older folks -- offering insurance with no medical exam and insisting "you can't be turned down"? That's guaranteed-issue life insurance.

It doesn't take a rocket scientist to figure the angle: The death benefit is so low, the first few years of premiums may add up to more than your beneficiaries will receive.

Avoiding a physical sounds convenient, but you'll probably get a better deal by submitting to one, even if you're not in the best of health. If you know for a fact that you're uninsurable, you may not have a choice. But if you have alternatives, explore them first.

6. Stay on top of it

While health issues will make your insurance more expensive, getting healthier can mean savings. If you quit smoking, lose weight, or make other life changes that lower the risk for the insurance company, don't be afraid to contact them and ask for a reconsideration. But be prepared to provide proof, such as an extensive medical history, to get a lower rate.

Health isn't the only thing that can lead to changes in your policy and premium. Have a new baby? You might need more insurance. Pay off the mortgage? Might need less. Periodically re-evaluate your coverage needs and costs.

If you need to increase your coverage, you may be able to do so less expensively by buying a rider (an addition to an existing policy) rather than taking out a new policy.

7. Don't buy it on kids

Unless your child is contributing financially to your family, you don't need to insure their life.

As with the whole life vs. term argument, this is advice not fully embraced by everyone. There are those who insist that buying a permanent policy for infants is a good idea, for three reasons:

  1. If they should later develop a health condition that renders them uninsurable, at least they'll have some coverage.
  2. Although it's certainly more rare than with seniors, children die.
  3. They'll establish a permanent savings account.

While these are valid arguments, they're not enough to convince me, or most objective advisers. Sure, children can develop a health issue rendering them uninsurable, and they can die. But the odds aren't high enough to pay for protection, especially for the high-cost kind that accompanies many whole life policies. A savings account for kids is a great idea, but there are lower-cost ways of going about it.

Bottom line? You don't have to be an expert to know whether you need life insurance. You just need to think about what would happen if a paycheck suddenly vanishes. If you have the need, do some reading, do some shopping and take action. If you need help, find it. But don't rely entirely on online calculators or commissioned salespeople.

More from Money Talks News

Apr 22, 2014 2:16PM
The only good life insurance is for, is the ones you love, if you love no-one then it is a waste of your money!
Apr 22, 2014 1:01PM

Single, no kids and hoping to stick it my creditors when I die.

Apr 22, 2014 2:52PM
Most definitely with all of the illegal's in this country driving without licenses and most of the time drunk or stoned you need to cover yourself, unlike the three friends I had who were killed by these ______. They only had a little life insurance and since the thing that hit them had none they had to sue their auto insurance company to pay fro the remainder of a burial. If the president wanted to correct a real insurance delimina go after this group of sub people.
Apr 22, 2014 1:29PM


Apr 22, 2014 4:17PM
There is a reason that every state in the country has an insurance commissioner and licenses insurance agents.  It's called accountability.  Stacy does not list her credentials (is Stacy a licensed insurance agent?) so it is difficult to determine the credibility she has in offering advice on the purchase of insurance.  And, if she is licensed, shame on her for providing blanket advice on purchasing (or not purchasing) insurance.  The best advice I have ever been given is to not listen to broad-based advice on TV, radio, or news, but instead hire a professional with credentials.  Find someone you can trust who is duly licensed and work with them.  Commission-based, or fee-based, it does not matter.  What matters is that 1) you trust them, 2) they are professional, and 3) they put you in a better financial position than you are currently in.  All of this worry about how other people make money is only putting one person against another and no one benefits that way.  Work toward win-win solutions and forget the big noise of the media.
Apr 22, 2014 4:15PM
I love how this person states not to buy from a commissioned sales rep. I work in an insurance agency. We do not advertise. Clients come from referrals from the excellent job we do. If you are twenty years old and in perfect health you do not need an agency. But, if you have any health conditions it is best to let a reputable agency "shop" for you. As an underwriter for this agency, I shop with 5-10 companies and they compete for the business. Do you know which companies will give you the best rating with high blood pressure and which ones will not? I have companies offer super preferred and another company will decline the same client. If you go to an agency and they pull out an application, you are at the wrong agency. It takes 2-3 months to underwrite our clients. We don't make much money from term insurance and in reality sometimes lose money. Term is a good cheap way to go for most people. We recommend it for our clients all the time. However, there are many client's that pass through here, that bought a 20 year term policy and need insurance in their 50's and can no longer afford it or are uninsurable. There is much to think about when purchasing protection for your family.
Apr 22, 2014 3:42PM

Your life insurance policy may also be used to pay for your wife and her new husband's extravagant European honeymoon.

Apr 22, 2014 3:54PM
This article is full of half truths.How much did the author get for pushing Tiaa Cref and Ameritas.They're insurance is no cheaper than any of the top 10 companies.Avoid commissionable sales people,huh?Advisors don't work for free.He or she doesn't work for free.These internet "advisors" are a plague,just like some doctors who claim they have a cure all.
Apr 22, 2014 6:45PM
When my mom passed away, I found an old paid up life insurance policy among her papers.  So I tried to locate the company, to no avail  I then contacted the state's insurance dept and learned that company had gone out of business.  So..... if you're going to get insurance, get with a well-known company.
Apr 22, 2014 3:31PM
Wrong advice about not buying life insurance on kids, Stacy.  The premium is based on age and is dirt cheap for kids. What a better gift than to buy your 1 year old kid say a 20 Pay whole life policy. On average, around 15-20k of coverage will cost approx. $10 per month. When the child is 21, they have a paid up policy that will sit there and earn interest the rest of their life. The author is correct that there is always the chance the child could become uninsurable at some point in their life, so get it while they are young and healthy. 
Apr 22, 2014 3:42PM

I'm from a large family- 11 kids.  My parents had life ins on us - just enough to bury us, the value it earned they gave to us at age 18.  I carry it on myself and my daughter.  TODAY, you go to a funeral and I feel like families are begging because some smart financial person said its a waste....but where is the money they saved when they didn't buy it but need it??????

Apr 22, 2014 3:35PM
Wonder if the author knows what percentage of people actually collect on Term Insurance?  And what is one of the most profitable forms of insurance to insurance companies? Should make us wonder who this author really works for? Or how is in the position to write about this subject matter. Would not want to further dissect this article, based on the comments, I think we all are seeing how many of these articles on various subjects are written and who for. Just get a 2nd opinion from those that are not writing financial articles or TV personalities, but instead from those who specialize in their industry, with access to all options and companies available.
Apr 22, 2014 2:19PM
Get a real big policy, make years of payments...only to have to cash it in...when you lose your job.
Apr 22, 2014 10:55PM
What a joke? I have been helping people for 14 years and I am sooo sick of all these articles that hurt people. I just had a client that needed insurance for his family, not buy insurance because of an article like this. I bet you this person is not a licensed agent. In my career, I have had people that decided that the policy we put together for them was too expensive and that nothing would happen to them Then a year later and they have a heart attack. Now they do not qualify for the coverage they need . Even worse, I have had people not buy then something happens and their family calls asking if they had coverage through us. We never know when we are going to go. That's why it is a good thing to have insurance for your family. Its not for you. Its for them. Who knows what kind of financial position they will be in when you pass. What if they do not have enough money to pay for your funeral? Buying term is a great way to protect your family for a limited amount of time. What happens if you outlive that time frame? Most people that I insure would like to be covered for the rest of their life.
Apr 22, 2014 10:13PM
I have life insurance, but since I have no heirs, I sometimes wonder why.
Apr 22, 2014 2:36PM
What about using it to give away money to your favorite charity or cause exponentially if you have no one you would like to leave the benefit to?
Apr 22, 2014 5:36PM
Seriously is the author of this article a complete idiot? First, the average saving account yields 1% at best vs. the 6% average for life insurance. The younger you buy the cheaper your premium will be, SO START YOUNG! now Second, lets go onto " When you've paid off the house, the kids are gone, the savings account is topped off, and your death is just an excuse for your remaining friends to get together and have a drink, your need for life insurance is over." Stacey, you obvious never heard of estate tax. If your house is completely paid off and you decide to kick the bucket guess what uncle Sam will do? that's right, he digs into your pocket and takes half for himself. So that house you paid off is going to be half his unless you or your next on kin have some means to pay for it. Lastly, you advice people to buy term?  really? term is the worst thing to buy!  yes it is cheaper INITIALLY , but guess what happens as you grow older? that $50 a month permanent  policy (cash value) you advice people not to buy is going to eventually turn into a $300 a month term policy (no cash value) that most people wont be able to afford! o and here's the kicker... sooner or later when you decided it almost your time to go and you don't want to leave your family with a $15,000 funeral expense (based on CA cost) you're probably un-insurable.

P.S. I don't know about you but I've never heard of ANYONE selling insurance and not making commission. 
Apr 23, 2014 12:28PM
I've never known a widow that said her husband had too much life insurance.
Apr 23, 2014 7:51AM
Unless you are rich or single. Absolutely!
Apr 22, 2014 4:00PM
Life Insurance... I betting I'll die and the Insurance company is betting I'll live to pay in more premiums. Touchy subject, damn if you do and damn if you don't.  Do I die and pay for a wife's new wedding? - or - live life in the fast lane as a single stud. Tough decision! 
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