Base life insurance on need left behind

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Q: Now that I have a family, I'm thinking about the need for life insurance. Do I need more coverage than the amount my insurer provides, and how much is the right amount?

A: Most consumers normally don't think about life insurance until an important event takes place -- a marriage, the birth of a child, the purchase of a home or the death of a friend or relative. Brokers say that's the way it should be, since those events highlight a new or previously unrecognized need.

"When do you need it? It's the minute someone else depends on you," said Byron Udell, CEO of AccuQuote, a Wheeling, Ill., quotation and brokerage firm.

The problem, brokers say, is people all too often neglect to act on that need even though most don't carry enough life insurance.

Half of U.S. households now have at least one person with an individual life insurance policy, down from 55 percent in 1992, according to LIMRA, an industry research association.

Many employers, especially large companies, provide workers with some limited level of life insurance, usually two to three times an employee's annual income. But that coverage falls far below what most people's survivors would typically need.

Many employers allow people to buy additional coverage through the corporate group plan. But before doing so, consumers should check to see whether that coverage is portable if they leave for another job, said Don Cullen of The Young Agency, a Syracuse, N.Y., independent insurance agent.

There are norms for figuring out how much additional insurance you need. They vary depending on who you talk to, and needs also differ by a consumer's personal circumstances. The usual rules of thumb suggest that people have total coverage of between five and 10 times their annual income. For someone who earns $40,000 each year, that means taking out a policy valued at between $200,000 and $400,000.

But some brokers say that is often not enough for many people, particularly those with younger families who expected to depend on their earnings for many years to come.

"The rule of thumb that I have is that all rules of thumb are wrong because what you really have to do is do a really careful needs analysis," said David Woods, president of the Life and Health Insurance Foundation for Education, an insurance education group funded by the industry.

Mr. Woods and others say consumers should figure out how many years their survivors would need to replace their income and what percentage of it would need to be replaced, allowing for inflation and interest income. They can then subtract current savings from that cumulative figure to determine how much coverage is needed.

The good news for consumers is that life insurance has gotten much cheaper in recent years. As recently as 10 years ago, a healthy 40-year-old man who has never smoked would have paid nearly $1,000 annually for a $500,000 term life insurance policy, a rate to be held steady for 20 years. But such a consumer would now pay less than $400 a year for the same coverage, Mr. Udell said.

A conversation with an insurance agent can help a consumer figure out how much coverage is needed. An agent will ask a number of questions about family and personal health conditions, and once a policy is settled on, arrange for a physical examination, paid for by the insurer, to verify good health.

ASSOCIATED PRESS