Three key life insurance questions

The life insurance industry reported an unprecedented surge in the purchase of life insurance in the aftermath of the terrorist attacks and the anthrax scare. If you are among those considering buying life insurance beyond what you may already have through work, Dennis Filangeri, a certified financial planner based in San Diego, suggests you ask yourself the following three key questions.

Do I need life insurance?

Anyone with people who depend financially on them usually should have life insurance to help provide income and pay large bills, Filangeri says. This usually means focusing on the family breadwinner who has a spouse and dependent children, but that can mean overlooking other needs.

For example, you might want coverage for a full-time at-home spouse with dependent children to replace the cost for day care and other services such as housecleaning and home repair. Don't overlook your parents, who might already be receiving care from you or who might need financial help in the future. Also, don't overlook friends or relatives who have co-signed a loan. Business partners also have a vested financial interest in your life.

You may have other needs for life insurance, as well. Despite the passage of the Tax Relief Act in 2001, federal estate taxes are not scheduled to be eliminated until 2010 and they're scheduled to be reinstated in 2011. Owners of estates vulnerable to federal or state inheritance taxes may still want life insurance to help pay the bill so that a larger chunk of their assets flow to their heirs. Charitably inclined people also may want to provide death benefits for their favorite charities.

How much insurance should I buy?

The rule of thumb, Filangeri says, is to figure four to 10 times one's annual income. However, as noted above, life insurance isn't used only to replace income. Personal circumstances make the needs of each insured person unique, so carefully calculate your needs so that you don't buy too much or too little.

Obvious needs might include immediate one-time expenses such as the funeral and medical costs associated with the death, estate taxes and more long-term costs such as income replacement for daily living expenses. Other costs you might not think about are expenses you may not currently have but that your survivor will face, such as day care, and future needs such as college, lost retirement benefits for the survivor and support for aging parents. A special needs child would require extra funds as well.

How much you need will depend on other financial factors, such as whether both spouses are working or whether a non-working spouse would be able to get a job. Also take into account the amount of your debts, investments you might be able to sell, pensions, other inheritances survivors can count on and how long you'll need to provide for some of these expenses. Social Security also may provide benefits for minor children and for the surviving spouse.

All these variables need to be considered to come up with a more accurate amount of capital needed through coverage instead of merely guessing with a rule of thumb.

What kind of life insurance should I buy?

Life insurance comes in many forms — term, whole life, universal life, and variable. There's much debate over whether you should buy coverage that provides only pure death benefits, or coverage that includes a savings or investment component. However, before choosing which kind, answer first the questions of how much you need and for how long. Insurance should be bought first and foremost for the death benefits, not as an investment.

Don't let the cost of premiums or investment needs be your first criteria. Once you've determined how much coverage you need and for how long, you can then select the type of coverage that best fills that need at a cost that you can afford.

For example, an investment-type policy may be appropriate for you. However, if you reduce the amount of coverage you determined was necessary just so you can afford the premiums (part of which are going into the investment), then you're defeating the primary reason for which you're buying the insurance.

Zall is a retired federal employee who since 1987 has written the Bureaucratus column for Federal Computer Week. He can be reached at milt.zall@verizon.net.