Putting Life in Your Insurance

Everyone needs insurance to some degree, whether to protect assets or pay for unexpected injury or damage.

Determining the amount of coverage for a car or house is pretty simple. Calculating life insurance gets more complicated.

Single women with no dependents generally need little or no life insurance, maybe just enough to pay final expenses. Their dollars are probably better spent on retirement savings or disability insurance.

But many other women are underinsured, especially if they don't work outside the home. The financial impact of their death may not be obvious, since they don't earn a salary, but it is there, nonetheless.

If you work inside the home and have small children, a housekeeper or nanny might be needed.

Factor in college costs

And don't forget your children's education. Life insurance should also cover that sizable cost.

Let's assume you're married, with children, and that your husband would hire a nanny for 10 years after your death. Translate that cost into life insurance. First, calculate the annual expense, say $30,000, then assume a safe interest rate earned on the insurance proceeds. A $250,000 policy, invested at 7 percent interest, would generate the $30,000 needed, plus an extra $77,000 after 10 years for college and other expenses.

Another factor is the lifestyle of the person chosen as guardian for your children. Will your chosen guardian have the money to care for your children as you would like?

If they would need a bigger home, could they buy it? If you'd like one of the guardians to stay at home, instead of working, you should provide the money, through life insurance or other assets.

If you work outside the home, that income stream should also be protected. The standard formula is approximately five times annual salary. But look at the kind of lifestyle you'd like to provide for a surviving parent. If you want someone at home with small children, the standard formula may not be enough.

Or you may be overinsured. Did you buy insurance when your children were still dependent? If so, you might consider less coverage.

Among the different types of life insurance, the least expensive is term insurance - which covers you for a specific period of time. Term insurance carries no investment or cash value outside of death benefits.

Some insurance policies have an investment component - where the insurance company invests your premiums and pays you a return - and thus have higher premiums. There are all sorts of variables, ranging from the amount of the premium to how the money is invested.

The right policy depends on your budget, whether you invest (should you buy cheap term insurance and invest the difference?), and how insurance fits into your financial plan.

Estate taxes possible

Note that insurance proceeds figure into the value of your estate for tax purposes if your estate is the beneficiary of insurance proceeds.

If your total estate bumps up near $600,000 (above that amount and an estate tax applies), you might want to change ownership on the policy, and make sure an individual - not your estate - is the beneficiary.

Look at insurance as a base of financial security for you and your family. Make sure it covers catastrophic events, and then save and invest to provide the rest of life's necessities.

* A free brochure, "What you should know about buying life insurance," is available from the American Council of Life Insurance (800-942-4242).