Family Finance: Life Insurance

Denise Trowbridge
Denise Trowbridge

If your children or spouse depend on your income or unpaid labor to make ends meet, you need life insurance. But if you're like many parents—either elbow-deep in diaper changes or forever shuttling kids between activities—you haven't made the time to shop for a policy.

One in five households with children under age 18 lack life insurance, according to a 2016 study conducted by LIMRA, a nonprofit insurance industry trade group. On the bright side, that's about 3.7 million fewer families than in 2010. About 73 percent of respondents recognize they need life insurance, and 62 percent say they would be in immediate financial trouble if a primary wage earner died.

“Hopefully these findings will help get people's attention and serve as a wake-up call,” said Robert Kerzner, president and CEO of LIMRA. More than “37 million American families are completely uninsured and at financial risk if their primary wage earner dies unexpectedly.”

It's no wonder parents avoid shopping for insurance.Term life. Whole life. Universal life. Variable life. Navigating the alphabet soup of policy types is enough to make anyone's head spin. There's a bewildering range of choices, but the process doesn't have to be a headache.

When it comes to life insurance, it pays to keep things simple. The cheapest, most cost-effective option also happens to be the one that's best suited for most families: a level-term policy. It has the highest benefit for the lowest premiums and it's easy to understand. Policyholders choose a term, or period of time, to be covered, usually in increments such as 10, 20 or 30 years.

Next, choose the benefit, which is the amount the policy will pay. This can range from $50,000 to more than $1 million. The premium remains the same each year of the term. If the insured person dies, the policy pays a lump sum death benefit.

A level-term policy doesn't build cash value. It doesn't have an investment or a savings account attached. And that's a good thing. While such options sound appealing on paper—offering the potential for investment returns or paying premiums out of an attached investment account—those policies rarely live up to such promises, and they cost a lot more.

They also come with investment risk, and risk is not what you want when providing for your family in the wake of a tragedy. Life insurance's primary purpose is to provide money to care for those who depend on you.

How big of a policy do you need? Enough to cover funeral expenses and outstanding medical bills, pay off debt and meet long-term goals such as children's college tuition. It also should cover lost income.

After choosing the term and benefit, remember that term life comes in several flavors, so it's important to choose a highly rated life insurance company and then ask lots of questions to make sure you're getting what you need.

Decreasing-term life insurance has a death benefit that slowly declines over the duration of the policy. It often is used to cover debts such as a mortgage. Return-of-premium term policies refund all of the premiums paid if the policyholder doesn't die during the term. However, these options cost up to 50 percent more.

A convertible level-term policy can be changed into a permanent policy when it expires, regardless of current health. Some products automatically include this option. Others sell it as a rider, or add-on.

If you're thinking, “I don't need life insurance, I (or my spouse) have it through an employer,” you might still consider buying a separate policy. Employer coverage is usually equal to no more than two years' salary. That's usually not enough. Also, should you lose your job, the policy is terminated. You can't take it with you.

Someone who is laid off in their 50s might not qualify for the best term-life rates. Rates are generally lower the younger you are when you get the policy. For example, the lowest average annual premium for a 20-year, $250,000 level-term policy for a 40-year-old man is about $210, according to, an insurance cost quote site. For a 50-year-old man, it jumps to $491.

Denise Trowbridge is a self-professed money geek who writes about personal finance, banking and insurance. Follow her on Twitter at @DeniseTrowbridg.