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Insurance assurance

Here's how rattled Americans can shield their families from calamities.

IN THE WEEKS following the attacks on New York and Washington, many people spent some time thinking about how to protect their families financially. I know I did. One of the ways you do that is with life insurance. Unfortunately, notes J. Robert Hunter of the Consumer Federation of America, some of us tend to buy first and think later. "People have the tendency to buy life insurance after disasters like these and then drop [their policies] after a year." That can be an expensive mistake. Before you buy, consider these basic life insurance questions:

Do I need it? If you have a spouse or family that needs your income to meet living expenses, then you need life insurance.

How much do I need? Formulas vary, depending on whom you ask. The American Council of Life Insurers recommends five to seven times your annual income. Other experts say 10 times. Glenn Daily, an insurance adviser in New York, suggests you ask yourself: How much would my family need per year to live? How many years would they need that money? What big items would I want a policy to cover: college tuition, paying off the mortgage? Multiply the first two answers, then add the third to come up with a number. Adjust it for inflation (which has been running 2% to 3% a year). Then subtract the other resources that may be available to your family (Social Security, a group life insurance payout from an employer), and you have your answer. If you have a spouse who could support the family after some time to gear up, you probably want to buy a lump sum big enough for your dependents to live on while your spouse finds a job. If, on the other hand, your spouse has never worked, you probably want to buy a sum big enough that it could be invested to produce an annuity to support your family indefinitely.

Should I buy term or cash-value (whole life) insurance? Term insurance is the way to begin, Daily says: "It's much easier to understand, and you have a much better chance of getting a good deal than on cash-value insurance." And because it's much less expensive, you are more likely to be able to buy enough to meet your needs.

What should I look for in a term policy? Keep an eye out for three things, according to CFA. A policy of the right length: A 10-year term with a "level premium" (one that does not change) is recommended. Renewability: Level-premium policies are generally renewable without going through another insurance checkup. Convertibility: You want the flexibility to exchange your policy for a cash-value one if you want to do so later.

When, if ever, should I convert a term policy to whole life? Unlike a term policy, a cash-value/whole life policy remains in force for your whole life (as long as you pay your premiums). For many, a term policy works well because as retirement savings grow and children leave the "family payroll," the need for insurance evaporates. But, if you have a child with a life-long disability, converting to whole life can be a smart move. The same applies if you're in your 60s or 70s and need life insurance to cover an estate tax liability.

What's the best way to shop? Use a multimedia approach. Term life is easily available on the Internet. Although a few well-run sites offer comprehensive searches of available policies -- and turn up the lowest available price -- CFA recently released a study that shows 75% of others don't. (CFA specifically liked Accuquote, Quotesmith, Insweb, NetQuote and Term4sale.) For that reason, you'll also want to call and get several rate quotes from low-load insurers (those with low sales charges). Peter Katt suggests Ameritas (1-800-552-3553) and USAA (1-800-531-8000). Both have knowledgeable customer service representatives who give solid advice as well as good conversion rights, he says.

Should I worry about an "act of war" clause? Perhaps, warns Katt. Wartime exclusions typically have not been written into policies since the Vietnam War. But insurers suffered huge losses after Sept. 11, so Katt expects some to add them once again -- as well as terrorism clauses -- to new policies. That's why it's key to spend some time reading the policy you're buying.