Protecting my Assets: What kind of life insurance is right for me?

Money and You
by CARRIE POMERANTZ

Dear Carrie: I’m a 47-year-old single mom, and I’m looking for the best way to protect my house and provide for my 15-year-old in case I die. At the very least, I want the trustee of my estate to be able to pay off my mortgage ($600,000) and have something left over for my child. I know that term policies are relatively inexpensive, but is there a better option? — A Reader

Dear Reader: Insurance is a critical part of personal finance, and you’ve brought up an important question. At first blush, your choice may seem straightforward: Do you buy low-cost term insurance or a more expensive policy with an investment component? The answer depends on a lot of factors, with the key question being, “What is my objective?”

For many people, buying life insurance is pretty straightforward. For example, parents of young children want to make sure that there will be sufficient assets to provide basic needs and possibly college tuition or other expenses. Term life insurance can be an excellent solution because (a) you can time the coverage to accommodate your needs, and (b) you can fairly easily calculate the amount of coverage you’ll need. And for healthy, young people, the cost is quite reasonable.

But your situation may be more complex. Are you only looking for insurance for a set period of time, or are you actually doing some estate planning? When you say, “something left over for my child,” do you mean enough money to get through college or an inheritance?

So, your first step is to clarify and articulate your long-term financial needs and goals. You may want to enlist the help of an objective financial planner or an estate planner as you consider the following:

• Your big picture: Finding the right insurance product will probably depend on many factors, including the size of your estate, your income (and income potential), how long you plan to have a mortgage, as well as your other long-term financial goals: your retirement, certainly, but probably college for your child, long-term care insurance for yourself, or longer-term financial responsibilities for your child or other relatives.

• Your insurance “time horizon”: We often talk about the time horizon when it comes to investing, but it’s an important concept for insurance, too. For short-term needs, term insurance is certainly the cheapest and probably the best option.

If you are convinced your child will be self-sufficient by the time he or she graduates from college, for example, life insurance beyond that may be unnecessary. But if you think you’ll need coverage for an indefinite time (say, until you die), a permanent or whole life policy may be the better choice. Your premiums will stay level (most term policies are level, but only for a finite number of years; they can climb dramatically as you get older and have to renew).

Also, with whole life and similar plans, part of your premium will be invested so you’ll be building an asset for the future. Again, you’ll need to examine your financial future as a whole to find the best solution.

• You have lots of choices: Buying a term policy can be wonderfully simple; pick the term you need, shop around for a low premium and check out the insurer’s A.M. Best rating for financial strength. But if you need a form of permanent insurance, you will face a bewildering array of choices: whole life, universal, adjustable, variable, variable universal, etc.

This is where expert assistance will be so valuable — not only at helping you articulate just what you’re trying to insure, but also in helping you to identify which vehicle or combination of vehicles can help you get there. It’s possible that a term policy plus a permanent policy could work together effectively.

Proponents of term life insurance are correct that it is often best to purchase an inexpensive term policy and invest the difference yourself. The commissions on whole life policies tend to be much higher, eroding the value of the investment. However, it is also true that most term policies lapse before the policyholder’s death. In other words, the vast majority of death claims are paid on permanent forms of insurance, not term insurance.

Bottom line? It’s a very good start to know that you need insurance. But before you start shopping for policies, spend some time figuring out what you’re trying to achieve today and over the next few decades. Keep the proverbial “big picture” in mind. Then as you investigate the pros and cons of different policies, you’ll have the perspective to make the best decisions. Good luck!

Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER ™ is president of the Charles Schwab Foundation and author of “It Pays to Talk.” You can e-mail Carrie at askcarrie@schwab.com. This column is no substitute for an individualized recommendation, tax or personalized investment advice.