By Jeff Brown
Are you feeling poorer than before? Deep losses in stocks and other investments have left most people with shrunken retirement and college-savings accounts.
The natural response is to hope for a rebound, to sock away more savings every month and, sadly, to think about working longer and living more modestly in retirement.
While all that makes sense, take a look at another part of your financial picture: life insurance. If you have children or other dependents, boosting your life insurance can be a good and relatively inexpensive way to provide for your survivors if something unfortunately happens to you.
If you’ve never shopped for life insurance, or have not done so for a few years, bone up with some of the BankingMyWay.com articles on the difference between “term” and “permanent” policies.
Term policies are cheaper, more straightforward and easier to understand. You pay an annual premium for a given level of coverage, say $250,000, and the policy pays off if you die within the term covered, which is typically 10 or 20 years. If you do not die during that period, your beneficiaries get nothing.
Permanent policies come in wide varieties, typically providing coverage no matter how long you live. Many serve as investments on top of providing death benefits. The extra features boost premiums substantially.
State Farm’s online quote service offers a 10-year, $250,000 term policy to a 50-something, non-smoking man for about $1,600 a year, compared to $8,400 for a permanent policy for the same amount.
Because term policies are so much cheaper, they are generally the best choice for people whose main interest is to provide a death benefit for a set period, like until your children are grown, for example. Permanent policies are better if you really need lifetime coverage.
So how much insurance do you think you need? An old rule of thumb says coverage should equal five to 10 times your gross annual salary, but many factors should be considered. People with a lot of children obviously need more coverage that those with just a spouse.
Fortunately, life insurance pay-outs are tax-free to the beneficiaries, so a $500,000 policy will really put $500,000 into their pockets.
If your goal is to make up for investment losses, you probably have a good idea how much coverage you want. But if your holdings fell by, say $100,000, you may want more coverage than that to make up for the investment gains the $100,000 could have achieved in the coming years. At a 7 percent annual return, $100,000 would grow to $200,000 in about 10 years, for example.
With the Savings Taxes & Inflation calculator you can see how your lost nest egg might have grown under normal conditions. Use the Retirement Planner to get another view of the shortfall you need to make up with insurance. Run both calculators a number of times, changing the inflation rate, investment return and other factors, until you’re confident your insurance would provide enough under less-than-ideal conditions.
Then use the Quote Comparison tool to shop for a policy.
Most of the big insurers have websites that offer quotes or product descriptions, including MetLife (Stock Quote: MET), Prudential (Stock Quote: PRU) and Lincoln National (Stock Quote: LNC)
—For more ways to save, spend, invest and borrow, visit MainStreet.com.