Three factors determine need for life insurance

Life insurance. Two words that can spoil even the most perfect day. It’s confusingly complex, can be expensive and it’s all about death — very often the death of you or someone you love. While I can’t do much about the second two characteristics, I can clear up much of the confusion.

The purpose of life insurance is simple: It’s there to satisfy a financial need that will accrue as the result of an early death and that will go unfulfilled by other available resources. That’s it. Three parts. Financial need, early death and unmet by other resources. If all three don’t apply, then you don’t need life insurance. If there’s no financial need, then you don’t need life insurance. If the need doesn’t accrue from an early death, but from a death at or beyond life expectancy, then you don’t need life insurance — or, at least, it’s not a practical solution. If a need exists because of an early death, like replacing lost income for a survivor, but sufficient assets exist, or will become available to replace this income, then you don’t need life insurance.

Life insurance can be either temporary or permanent. Temporary insurance is called term insurance, and it covers a variety of temporary needs, from one year to a lifetime. You pay premiums in advance for a specific period of time and if the insured person dies during that time, the face amount is paid, in cash, tax-free, to the beneficiary. Your Federal Employees’ Group Life Insurance (FEGLI) coverage is group term life insurance. Term life insurance is the most cost-efficient form of life insurance. You know exactly what it costs and what it will pay out, if it ever pays out.

The bad thing about term insurance is that the price goes up as you age. It’s only practical to cover a need that is expected to end well before you reach your life expectancy. If you buy term insurance that covers you through your life expectancy, and you live that long, your beneficiary will wind up getting your premiums, plus a nominal return, as the death benefit.

Permanent insurance is basically annual term insurance with an investment side fund built in. Your premiums are more than the cost of the term insurance, and the excess money is invested on your behalf. The death benefit is usually fixed and includes the value of the side fund, or cash value, so your beneficiary is getting your money as part, or nearly all, of the death benefit. Like term insurance, if you live long enough, you are essentially self-insuring. Permanent insurance can be whole life, with all values guaranteed for life; or universal or variable life, with few guaranteed values.

Your FEGLI coverage is something between a great deal and a lousy one, depending upon your circumstances. The only way to know is to compare. Unless you are in bad health or have other risk factors, you can probably find less expensive coverage on the individual market, so it’s worth the effort to shop around. With today’s online insurance agencies, it’s easier than ever to see what’s out there.

Start by determining your need for insurance. If you don’t need it, don’t carry it, through FEGLI or any other source. If you do, then determine how much you’ll need and for how long. Then the question is where to get it. Fortunately, you only need to compare term insurance. You’ll be better off avoiding permanent insurance in most cases.

Look for term insurance with premiums guaranteed to remain level for as long as you’re likely to need the coverage. You can always drop the coverage if you no longer need it. Favor large, well-known carriers with high financial ratings. Compare the cost  with your FEGLI coverage over the entire term before making your choice.

Since needs change, repeat this process every few years.