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Viewer comment - From California...
I have had the opportunity to visit quite a few insurance web sites looking for information
on term insurance. I have found that this site is by far the most concise and informative in
terms of information you need to know when shopping as well as the rate information itself...

Do You Need Any At All Or Do You Need $1,000,000?

by David Frucella

Before I talk about whether you need life insurance or not, let me make one important point.

Since you're reading this, I will assume you have some level of interest in life insurance. If you are in the process of considering coverage, I want to make a very strong recommendation. Talk to an experienced agent, who works with several carriers and is licensed in your state. I say licensed in your state because the Internet is full of telemarketers that are given a script and told to "sell something." Volume is their game. Their company may be licensed, but you want to talk with a person individually licensed in your state. Legally that's important. Ask them how long they have been licensed. Ask them to fax a copy of their license for your state. If they can't produce it, move on. I'll bet you will save yourself some money.

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An experienced agent can walk you through the nuances of underwriting - here's an example:

You're 40 years old, in great health - run every day - cholesterol is low - everything perfect. The one problem is your father died of colon cancer at age 58.

You go to XYZ website. Figuring your health is great; you will easily qualify for the best rate. You see a rate at Super-Preferred of $365 for $500,000 for 20 years. You fill out the forms online, take an exam and wait 4-6 weeks for an answer. Result, you get Standard rates - premium jumps to $650. You call the Internet sales company. They tell you it's because of your father. Take it or leave it. You probably take it. Who in their right mind wants to start over?

Ninety-nine percent of the companies will knock you down 2 notches on the health table just because of your father. By taking a few minutes, an experienced agent could have pointed you to one particular highly rated carrier that would overlook your father's cancer. They could offer you a rate of $430 per year. That free call would have saved $4,400.

There are plenty of experienced agents out there. It is not hard to find one (of course, there is AmericaQuote). My advice is to take advantage of the experience.

Now, back to the original topic...

Generally, it's pretty simple to figure out if you need insurance and how much. If you have no dependents or no one depending on your income, you probably don't need any.

Some Bad Advice... In 1970, I was in the Army as a young Second Lieutenant. A life insurance salesman approached me. He recommended that I buy a savings policy (aka whole life). I had no dependents, no needs, and no worries (except for maybe getting killed in Vietnam). He convinced me to buy some at that time, lock in the premium before it got more expensive. I'm sure some of you got the same sales pitch. Looking back, it was bad advice. No one had anything to financially gain or lose by my death. So if you have no one depending on your income or estate, I would pass on any coverage.

The situation changes dramatically if you have children. I use a simple formula. Take 10 times your current income and add college expense or each child (2006 numbers are $15,000 per year for public college and $40,000 for private). The college expense would be invested and not be used for any current income needs.

This formula in many cases will dictate over $1,000,000 of coverage. Most are astounded to hear that number. But let's look at that for a moment. Assume we have someone making $100,000 per year, has a spouse and two young children and wishes to replace 60% of that income, adjusted for inflation. That's $60,000. Let's assume a 5% rate of return and 2% inflation with a tax bracket of 20%. Let's see how fast $1,000,000 disappears.

I'm going to use annual figures to keep it simple. Please see the table below. In year 1, there is a $1,000,000 to start - we deduct $60,000, leaving $940,000 to earn interest at 5%. At the end of year 1, the interest earned (after tax) is $37,600 added to the $940,000 equals $977,600. In year 2 we start with $977,600 to start. Here's where compounded inflation starts to kill you (no pun intended). Remember I'm using a 2% annual inflation rate. When the government announces the inflation rate each year and it's at or below 2% on an annualized basis, everyone says "inflation is in check" and all the economists are happy. This is not true. Inflation, even at 2%, will eat your savings alive.

In year 2, we are adjusting that $60,000 by the inflation rate. So this year, we need $61,200 ($60,000 + $1,200) to keep pace with inflation. Our capital of $977,600 in year 2 produces $36,632 of after-tax interest, so we start year 3 with $952,432.

Here's where it starts to spiral down. Again inflation compounds, as we have to add another 2% to the $61,200 making the income requirement in year 3 $62,424. You can see from the chart below where this winds up - down to zero in less than 20 years.

So here's what it looks like:

Initial Capital: $1,000,000 Initial Income: $60,000
Interest Rate: 5.00% Inflation Rate: 2.00%
Tax Rate: 20.00% After-Tax Interest: 4.00%

Year Capital Income
Capital To
Earn Interest
1 $1,000,000 $60,000.00 $940,000.00 $37,600.00
2 $977,600.00  $61,200.00 $916,400.00 $36,656.00
3 $953,056.00 $62,424.00 $890,632.00 $35,625.28
4 $926,257.28 $63,672.48 $862,584.80 $34,503.39
5 $897,088.19 $64,945.93 $832,142.26 $33,285.69
6 $865,427.95 $66,244.85 $799,183.10 $31,967.32
7 $831,150.43 $67,569.75 $763,580.68 $30,543.23
8 $794,123.91 $68,921.14 $725,202.77 $29,008.11
9 $754,210.88 $70,299.56 $683,911.32 $27,356.45
10 $711,267.77 $71,705.55 $639,562.22 $25,582.49
11 $665,144.71 $73,139.67 $592,005.04 $23,680.20
12 $615,685.24 $74,602.46 $541,082.78 $21,643.31
13 $562,726.10 $76,094.51 $486,631.59 $19,465.26
14 $506,096.85 $77,616.40 $428,480.45 $17,139.22
15 $445,619.67 $79,168.73 $366,450.95 $14,658.04
16 $381,108.98 $80,752.10 $300,356.88 $12,014.28
17 $312,371.16 $82,367.14 $230,004.02 $9,200.16
18 $239,204.18 $84,014.49 $155,189.69 $6,207.59
19 $161,397.28 $85,694.77 $75,702.50 $3,028.10

Obviously, in the scenario, there is no factoring for Social Security or any other survivor benefits. All I want to illustrate is $1,000,000 is not what it used to be and is not an unreasonable amount of coverage.

The last point is: should one insure a non-working spouse? This is usually the wife staying home with the children and returning to the workforce later. If there are young children, I recommend the cost of full time help over several years. This usually is $250,000 to $350,000. If the spouse is also an income earner at the same time, the same 10 times income rule applies. If the spouse has a professional degree and is currently not working outside the home, $750,000 to $1,000,000 is not out of the question.

One last thought: We received the email below in 1998. She obviously wasn't a client of our, but shares her pain where some life insurance could have helped. It's bad enough to lose a loved one, but it's worse to lose them and be broke on top of it.

5/19/98 - From Arizona...

Don't go without life insurance; it can be hell... I was widowed during Social Security - hassle - re: crushed back [auto/tree], no insurance... [husband's cancer preceded that], left me with ZERO income, checking the free net for work @ home [tough!]...

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