Life Insurance Ownership Is at a 50-Year Low, But Now's the Time to Buy

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Buy Life InsuranceLIMRA, the insurance research firm, recently released a survey with a couple of startling statistics. Namely, individual life insurance ownership is at its lowest point in 50 years, even though 40% of survey respondents said they'd immediately have trouble meeting their basic living expenses if a primary wage earner in their households passed away.

All told, the study found that close to a third of households have no life insurance coverage. To be fair, not everyone needs life insurance. If you're single and no one is relying on your income, you don't need it. If you're married, but you don't have kids, and your spouse could survive on his or her income alone, you don't need it.

But if you have kids, or anyone else who depends on your ability to bring home a paycheck each month, you need life insurance.

"Pretty Dramatic" Price Cuts

Interestingly enough, this low point in coverage coincides with a time when the cost of term life insurance policies -- the cheaper option, and the one that is generally sufficient for most people -- is at an all-time low.

"Insurers have been lowering rates for at least 15 years on term life insurance. In 1994, the lowest rate in the country for a 40-year-old male who wanted a $500,000, 20-year-level term policy was about $995 a year. Today, that same 40-year-old, in perfect health, could buy the same policy for well under $400 a year. So that's pretty dramatic," says Byron Udell, founder and CEO of accuquote.com.

These prices are influenced by a lot of factors -- interest rates, changes in life expectancy -- but Udell thinks they're slightly more likely to go back up at this point then they are to continue to fall, particularly if interest rates stay low (which limits an insurance company's ability to earn money on premiums).

Either way, if you've been putting off purchasing a term life policy, now's the time to buy. Here's what you need to know:

• Where to buy. It used to be fairly easy to find a life insurance agent, but they are fewer and farther between these days, says Udell, largely because prices -- and thus commissions -- are so low. These days, your best bet is the Internet, where you can search for and compare policies on sites like Udell's or Insure.com. Compare your options not only by price, but by the company's rating, which tells you how financially secure it is.

• What to look for in a policy.
Term life insurance is generally sold in 10-, 20- and 30-year policies. If your kids are teenagers, and you just want coverage until they graduate, you're probably fine with 10 years. If they're younger, or your spouse is dependent on your income as well, you want a 20- or even 30-year policy. If you truly want coverage until you die -- and not just in case of an early or sudden death -- then you probably want a permanent policy. But keep in mind that the premiums can be up to four times more expensive.

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When in doubt, go longer, says Udell, because while the premiums will be more expensive on a 20-year policy than on a 10-year policy, you can always stop paying when you don't need it anymore. If, on the other hand, you get a 10 year and decide you really needed a 20 year, you may have trouble getting another affordable policy if your health has declined by the time those 10 years are up.

"You can sometimes convert a 10-year to a universal or whole policy, but it will be a permanent premium," notes Udell. "You won't have to qualify medically, but let's say a 40-year-old bought a $500,000 10-year term policy for $230 a year. Ten years later, when he's approaching age 50, assuming prices are the same as they are today, he'd be looking at $4500 a year to convert it to a term policy with level premiums." If you do go short, make sure your policy has that option to convert -- some don't, and some require you to do so within the first five years.

• How much coverage you need. In general, it's more than you think. There are a lot of rules of thumb floating and formulas floating around -- many say you can just multiply your income by seven or eight -- but I don't like any of them. I think it's better to actually take a look at your current income, and figure out how much of it your dependents would need to replace if you died. Be sure to take into consideration factors such as how long they'd need to replace your income, inflation, how they would invest the death benefit, and whether you want the policy to cover extras like paying off the mortgage, college, or an inheritance. You don't have to do this on paper. Insure.com has a good calculator, as does Udell's site.

• How healthy you are. These policies are underwritten, which means you'll need a medical exam. The results of that make a big difference, a few hundred to even a thousand dollars a year at the current term-policy rates. But if your health changes in any way -- particularly if you've stopped smoking -- be sure to call up your insurer and ask to be re-underwritten, says Udell.

"Smoking alone causes your rate to quadruple," he explains. "If you stop for one year, you'll get the standard non-smoker rate, which is around $750 a year right now. If you stop for three years, you might be eligible for the preferred rate, which is in the $400 range."
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