What Type of Life Insurance Do I Need?

he following article comes from the U.S. News ebook, How to Live to 100, which is now available for purchase.

About 11 million U.S. households with children under age 18 had no life insurance coverage as of 2010, according to LIMRA, a worldwide research and consulting organization for the insurance and financial services industry. Overall, less than half of U.S. households had individual life insurance, a 50-year low.

That means if the breadwinner or the person responsible for childcare and household management died prematurely, the loss of income or need to pay for those services could push the household into poverty.

While most consumers begin thinking about life insurance when they get married and start a family, it can be wise to buy a policy even sooner, says Allen C. McLellan, associate dean and an assistant professor of insurance at The American College. In fact, USAA Life Insurance reports that the number of single people buying life insurance is increasing, even as overall sales decline.

[See 10 Ways to Boost Your Social Security Checks.]

"A young single adult who's not married or not in a relationship certainly needs enough to pay their end-of-life expenses so their parents don't have to come in and clean up the debts," says McLellan. Single policyholders who offer financial or caregiving support to parents may want their policy to cover that need as well. Buying a policy while you're young and healthy also means lower premiums; however, older consumers may also want a life insurance policy to leave a legacy for their children or support a surviving spouse.

Whatever your age or life stage, the first step in purchasing life insurance is conducting a needs analysis. Several online life insurance calculators provide a benchmark, or an insurance agent can discuss your needs. Seven to 10 times your annual salary is a common starting point, but many other factors come into play. "They're going to look at your ongoing expenses, your mortgage, your rent, are you paying tuition?" says Whit Cornman, a spokesperson for the American Council of Life Insurers. "Also consider immediate expenses, medical bills, burials costs, the fact that the family may need money to move if they're going to have to switch jobs."

For a spouse who doesn't work, "Consider what do you think are the costs of replacing that person?" urges Cornman. "For people who do the cooking, take care of the household, day care expenses. If they're a stay-at-home-parent, what are going to be the costs of that?"

In general, people to tend to underestimate their needs. And as Marvin Feldman, president and CEO of the Life and Health Insurance Foundation for Education (LIFE), a nonprofit that educates consumers about financial planning and insurance, points out, in this market, people need more capital to earn the same amount of interest that they did a few years ago.

[See How to Finance Life Until 100.]

Life insurance comes in many different varieties, so once you've determined your needs, an insurance agent can help choose a policy to match. Term life insurance insures you for a specified time frame, say 15 or 20 years, while permanent insurance remains in force as long as you continue paying the premiums. Permanent life insurance is sometimes also called cash-value insurance because it can accumulate savings on a tax-deferred basis. Whole life, variable life, and universal life are all specific types of permanent life insurance.

"Term is very simple to understand," says McLellan, who compares term life insurance to paying rent. "When I stop paying the rent, I would lose the coverage. That's why many young people buy term life insurance off the Internet. Once I get into the complexities of whole life insurance or universal life, the game changes. Anything more than term is generally going to require the services of a licensed agent."

According to Amy Bach, executive director of United Policyholders, a nonprofit organization that provides insurance resources to consumers, the most commonly purchased option is a term life policy with a flat annual premium or semi-annual premium. "The problem with the term life policy," she continues, "is once the term expires, the premiums will go through the roof."

5 Ways to Lower Life Insurance Premiums

Life insurance companies use a variety of factors to arrive at a policyholder's premium cost. The customer's age, geographic location, existing health conditions, desired benefit amount and lifestyle are common criteria that companies plug into the algorithms they use to determine premiums. The most subjective of this criteria is lifestyle. Life insurance companies look at several aspects of a policyholder's mode of living and may consider any number of them as evidence the client presents a higher risk factor. A client who represents a high risk factor, meaning the insurance company's actuaries determine there is an elevated probability he will die sooner rather than later, invariably pays higher premiums than a client deemed lower risk. Lifestyle factors that often affect life insurance premiums include smoking, obesity, occupation and even hobbies. Enthusiasts of such activities as sky diving, bungee jumping, scuba diving and extreme sports, the kinds of things you see at the X-Games, can expect higher life insurance premiums, all other variables being equal, than someone who fishes and plays golf in his spare time. Obtaining lower life insurance premiums is a simple and effective way to free up money in a monthly budget. Because everyone likes the idea of paying less for the same thing, the following five tips can lead to lower life insurance premiums. STOP SMOKING Avoiding tobacco products is the simplest way to pay less for life insurance. Note the word used was simplest, not easiest. The difficulty of quitting smoking, once addicted, is extensively documented. Most would-be quitters try and fail several times before successfully giving up tobacco for good. In addition to better health, smokers thinking of quitting have an incentive to do it now rather than later. Life insurance is more expensive for tobacco users and often by a huge margin. A sample quote for a $500,000, 20-year term life insurance policy for a 30-year-old male has a monthly premium of $20.88 per month for a nonsmoker and $77 per month for a smoker. For a 50-year-old, the dollar amount difference is even starker: $81.35 for a nonsmoker and $337.75 for a smoker. A person who obtains life insurance as a smoker and subsequently quits does not have to apply for a new policy to receive lower premiums. Almost all life insurance companies lower a former smoker's premiums once he has been tobacco-free for a set amount of time. LOSE WEIGHT Apart from smoking, maintaining an unhealthy body weight is one of the biggest reasons people pay more than they should for life insurance. Obesity is linked to a variety of diseases that can lead to an early death, and therefore constitute risk factors to an insurance company. These diseases include diabetes, heart disease, stroke and cardiovascular ailments. Insurance companies generally use body mass index, or BMI, to determine whether an applicant's body weight falls within a healthy range. The BMI formula considers only two factors: height and weight. It ignores bone structure, body composition, or ratio of muscle to fat, and other variables that might increase a person's weight without contributing to ill health. The calculation does not even distinguish between males and females. In short, it is a flawed measure of health. Nevertheless, a life insurance policyholder needs to be mindful of his BMI if he wants to pay the lowest premium amount. For a male of average height, which is roughly 5 foot 10 inches in the United States as of 2015, the healthy weight range, as determined by the BMI calculation, is 132 pounds to 173 pounds. Drawing a quick mental picture of this male adult who weighs 132 pounds, and then realizing the BMI metric considers this healthy, provides a good indication of why it is flawed. Once again, however, insurance companies use BMI despite its shortcomings, which means anyone wanting to save on premiums should be aware of it. BE SAFE BEHIND THE WHEEL It is common knowledge that moving violations and at-fault traffic accidents lead to higher auto insurance rates. Many people fail to realize, however, that a poor driving record can raise a person's life insurance rates as well. Not unlike smoking and carrying excess weight, racking up speeding tickets and demonstrating a propensity to get in fender-benders represent risk factors to an insurance company. A policyholder who is careless behind the wheel is statistically more likely to suffer a serious car accident than someone who drives defensively and carefully. Because a percentage of car accidents are fatal, life insurance companies take this into consideration when setting premiums. Obeying posted speed limits and all traffic laws, looking out for other drivers and keeping a clean moving vehicle record, or MVR, can save big money on life insurance premiums. LOCK IT IN EARLY As of 2015, life expectancy in the United States is about 79 years. The closer a person is to this age when he purchases life insurance, the higher his premiums. It is simple math: when an older person buys a policy, the life insurance company expects to have fewer years to collect premiums before it has to pay a death benefit. Term life insurance policies, which only provide coverage for a fixed number of years, are also less expensive when purchased at a young age. This is because a person is statistically less likely to die in his 30s than in his 50s. Young people often act as if they are going to live forever, and they are loath to consider their own mortality. For these reasons, many of them neglect to secure life insurance at an early age while premiums are still cheap. This is a mistake. The younger a person is when he buys life insurance, the less he pays in premiums for the duration of the policy. PURCHASE TERM LIFE INSURANCE Life insurance comes in two types: term life insurance and whole life insurance. Their names describe them very accurately. Term life insurance covers a person for a fixed term, usually 10 or 20 years, though some companies offer term policies in one-year increments from three to 30 years. Whole life insurance, by contrast, provides coverage from the day a person takes out the policy until the day he dies. Because most term life insurance policies never pay a death benefit, as the policyholder is usually still alive when the term comes to an end, the insurance company can charge much less in premiums and remain profitable. A young person who maintains a healthy weight and does not smoke or skydive can often obtain $500,000 or more in term life coverage for a monthly premium of under $50. Trade Like a Top Hedge Fund What can technical traders see that you don’t? Investigator presents Five Chart Patterns You Need to Know, your guide to technical trading like the pros. Click here to get started, and learn how to read charts like an industry veteran.