A NO NONSENSE GUIDE TO
LIFE INSURANCE
HOW MUCH DO YOU
NEED AND WHAT KIND?
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I encourage you to speak with your insurance agent or an
SBLI representative about how SBLI can help you secure
the life insurance you need to protect your loved ones.
Best wishes for a wonderful financial future.
—JONATHAN POND
JONATHAN POND is one of America’s
has been far-reaching and widely
most trusted and knowledgeable
recognized. His 16 prime-time public
financial experts and a pioneer in
television specials and 21 books have
bringing low-cost, personalized
been critically acclaimed for their
money guidance to American
effectiveness in providing useful and
households. His work in educating
understandable financial guidance to
the public on financial matters
people of all financial circumstances.
The comments and opinions expressed herein are solely those of the author and do not reflect the
assent of SBLI or its officers, agents, or employees. SBLI and The No Nonsense Life Insurance Company
are registered trademarks of The Savings Bank Life Insurance Company of Massachusetts. NAIC #70435
©2013 The Savings Bank Life Insurance Company of Massachusetts, Woburn, MA. All rights reserved.
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Buying life insurance is a three-step process:
If you have young children, you should have
First, you’ll need to determine how much
six to seven times your salary in coverage.
coverage you’ll need. Next, you need to
In theory, this would give your family time to
decide what kind of policy to buy. Finally,
get back on its financial feet if you passed
you’ll need to choose an insurance company
away. If both you and your spouse work, you
(sometimes called a carrier). This guide will
may not need quite as much. But it’s wise for
help you master all three steps.
each of you to have at least a couple of years’
net income in life insurance—more if you have
Deciding How Much Life Insurance You Need
young children.
Before you start talking to insurance agents,
researching online, and reading policy booklets,
Once you’ve determined your bare minimum
you’ll need to determine how much coverage
life insurance needs, you can assess how
you need.
much life insurance you think is appropriate.
You may be confident that your family will be
First, determine whether you need life
fine with the minimum amount of coverage.
insurance at all. If you have no dependents,
Or you may want to increase your policy so
you may not. But be careful; a spouse and
that in the event of your death, your family
children aren’t the only kinds of dependents.
has enough to pay off the home mortgage
Your parents may need your financial
or pay for your children’s or grandchildren’s
support in the future. And even couples
college education, for example.
with dual-incomes and no children may
need life insurance if they spend at a level
Changing Insurance Needs
the surviving spouse couldn’t sustain alone.
Family insurance needs follow a cyclical
Finally, even if you have no dependents, you
pattern, so you may prefer to buy insurance
may want to use life insurance to benefit a
that lets you change the level of coverage.
long-term partner or favorite charity.
As your family grows, you need more
insurance. The need peaks when children
The next step is to realistically estimate the
are young and declines as they get older
minimum coverage you need. If you have
and closer to living on their own. Indeed,
family members who are truly dependent on
many people’s life insurance needs
your income, a base minimum life insurance
decline significantly once the children are
coverage should be the equivalent of six to
permanently out on their own. Retirees may
eight years’ worth of your current net income
not need any life insurance at all.
(that is, your salary after taxes).
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One more consideration: if you think your
You can buy a term life policy that is quite
estate will be subject to estate taxes, you
flexible, allowing you to up- or downgrade
may want to use life insurance to help pay
coverage as needed. One of the drawbacks
those taxes. And if this is the case, your life
of term coverage, however, is that the older
insurance policies should probably be placed
you get, the more expensive it becomes.
in a life insurance trust. Your insurance agent
On the other hand, some people need less
or financial advisor can tell you more.
insurance as they get older.
Online tools and calculators can help you
determine how much life insurance coverage
you may need. SBLI’s Coverage Estimator
(www.coverage.sbli.com) asks some simple
questions about your life circumstances and
“You can buy a term life policy
that is quite flexible, allowing
you to up – or downgrade
coverage as needed.”
gives you a suggested policy amount.
TYPES OF LIFE INSURANCE POLICIES
There Are Several Types of Term Life Policies:
Life insurance comes in two basic flavors—
1. Level Premium Term
term and cash value—plus a hybrid, universal
Level premium term policies are
life. Term insurance is pure life insurance,
particularly attractive for those who
while cash value insurance provides both
need life insurance protection for a specific
insurance protection and a savings/
period of time. Level premium policies
investment feature. The following will
provide a fixed amount of protection at a
help you better understand the difference
fixed annual premium over a fixed period
between term and cash value insurance, as
of time, which generally ranges from ten
well as the variations within each type.
to thirty years. For example, the parents
of a young child might purchase twenty-
Term Insurance
year level term policies for each parent so
Term life insurance is designed for one
that the family is protected until the child
purpose: to provide protection for your
graduates from college.
dependents if you die. Only your beneficiaries
benefit from the money you spend on term
If the term life policy you purchase
life insurance premiums. Term life is relatively
has a fixed life span, you have to buy
cheap, which often makes it the coverage of
an entirely new policy when the policy
choice for young heads-of-household who
expires. This means getting a new
don’t have a lot of extra money, but who
medical exam and starting the entire
understand that insurance is crucial when
application process over again from
young children are in the picture.
scratch—even if you’re buying a policy
identical to the old one.
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2. Yearly Renewable Term
Cash Value Insurance
If health problems have arisen since you
Unlike term insurance, which only benefits
bought your earlier policy, you may not
your heirs, cash value insurance provides a
be able to get a new policy. One way to
savings/investment vehicle. Whether it fits
avoid this is to buy a “yearly renewable”
your needs depends on numerous factors,
term (YRT) policy, which allows you to
including your age, financial circumstances,
renew your insurance without having
and risk tolerance. Cash value insurance
to prove your insurability all over again.
comes in four main varieties:
Make sure any term insurance you buy is
annually renewable for as long a period
1. Whole Life Insurance
of time as you are likely to need the
Whole life insurance combines the
insurance.
protection of term insurance with a
savings aspect. You pay a fixed premium
You can also buy a decreasing face
for as long as you live, and the insurer
value YRT policy wherby premiums
pays a set death benefit. Since both the
stay level—or decrease slowly—while the
policy face value and the death benefit
value of death benefits decrease. Another
are fixed, you overpay for coverage
alternative is a fixed face value YRT policy,
at first but pay comparatively lower
where the premium goes up with each
premiums later on.
renewal while the value of the death
benefit stays constant.
A portion of each premium you pay
goes directly to pay for the protection.
3. Convertible Term Policy
The remaining amount is invested by the
A convertible term policy gives you the
insurer on your behalf. Your “investment
option of converting your insurance
portfolio” constitutes the policy’s “cash
from term to whole life with no
value,” which can be withdrawn in the
questions asked. This feature may not,
form of loans, added to the death benefit,
under ordinary circumstances, seem
or used to reduce future premiums.
particularly thrilling. But if your medical
condition declines, owning a convertible
While whole life’s forced savings aspect
insurance policy could be advantageous.
may make it attractive to some people,
If you convert the term policy before it
premiums are steep compared to term
expires, you’ll have insurance for the rest
insurance. Furthermore, whole life policies
of your life regardless of your health.
can’t be altered as your coverage needs
change over time. But if you’re looking for
certainty, whole life may be the answer.
Many experts highly recommend the stability
of whole life over other, more apparently
flexible types of cash value life insurance.
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2. Universal Life Insurance
3. Variable Life Insurance
Universal life insurance combines the
This hybrid policy gives you a large
protection of a conventional term
measure of control over the cash value
insurance policy with the current yields
buildup. As with whole life and universal
available from short-term investments.
life insurance, a portion of the premium
buys pure protection while the rest is
Universal life policies separate the
invested by the insurance company on
insurance component of the policy from
your behalf.
the cash value. Part of your premium goes
toward pure protection, and the rest is
While whole life premiums are invested in
the cash value of the policy, which earns
low-yielding but safe securities, variable
interest according to a company contract
life premiums are invested according
or agreed-on financial index. Unlike the
to your preferences. You can direct the
cash value of a traditional whole life
company to invest in one of several
policy, the cash value of a universal life
combinations of stock, bond, and/or
policy grows at a variable rate.
money market mutual funds. Variable
life insurance may be right for you if
Universal life policies also offer greater
you like to take a hands-on approach to
flexibility for tapping into cash value
money management. The returns you can
than other types of insurance do. Under
achieve may be an improvement over
most traditional whole life policies, you
the performance of more conservatively
must either take out a loan or surrender
invested whole life portfolios.
the policy to access the built-up cash
value. With universal life—and some
There are two kinds of variable life policies.
whole life policies—you can make partial
Straight variable life has a fixed annual
withdrawals from the policy’s cash value
premium. The more popular universal
through the receipt of dividends.
variable allows more flexibility: the
policyholder can vary the premiums as
Universal life does have its drawbacks.
long as the basic minimum payments for
As an investment product, the returns
death benefits are paid. So in addition to
offered by universal life—like most
deciding how to invest the money in your
insurance products—may not always
policy, you can choose how much to invest.
stack up against other savings and
But with the increased possibility of
investment vehicles. Also, company fees
reward comes increased risk. The death
and agent commissions are generally
benefit of a variable life policy never
quite high and eat away at the overall
falls below a certain floor level. But the
investment return.
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amount of cash value is not guaranteed
have access to cash value through loans.
and could be severely reduced if the
Given the way single-premium policies
company’s investment portfolios
are structured, the emphasis is usually on
perform badly. While the policyholder
investment, not insurance.
can choose the type of investment,
insurance company money managers
Travel Insurance
or their designees still choose the
You no doubt have seen ads for accidental
underlying securities.
death insurance in airports. Policies are
sometimes sold right out of vending machines,
Variable life insurance cash values, like
at what appears to be a ridiculously low cost.
all cash value insurance, do receive
The cost is ridiculously low because the
favorable tax treatment. Cash value
chances of your survivors ever benefiting from
increases are not taxed until the money
one of these policies are also ridiculously low.
is withdrawn from the policy. In other
Some credit card companies also offer travel
words, policyholders get tax-deferred
insurance at an extra cost. Believe me, they
growth of their policy’s cash value.
are making a bundle on this outrageously
expensive insurance. Bottom line: Don’t buy
4. Single-Premium Life Insurance
travel insurance.
If you have substantial cash reserves,
single-premium life insurance may be
an attractive option for building taxdeferred savings for retirement. By
paying a single lump sum— which can
be as low as $5,000—you can purchase
death benefits and a cash value that
grows tax-free.
Single-premium policies may offer
attractive interest rates, but they
usually impose stiff penalties for
canceling the policy in the first few
years after purchase. Policyholders
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CASE STUDY
Based on these assumptions, Clarissa would
have an annual income shortfall of $30,000
Roderick Blake is 35. Roderick and his
($60,000 - $30,000) should Roderick die.
33-year-old wife, Clarissa, have two children
Roderick would need whole life insurance in
ages 7 and 3. The Blakes have a combined
the amount of $600,000 to provide $30,000
annual income of $75,000. (Roderick earns
in annual investment income, assuming that
$45,000, Clarissa earns $25,000, and their
the insurance proceeds could be withdrawn
investments earn about $2,000 a year.)
at a rate of 5 percent per year.
Should Roderick die tomorrow, his pension,
in which he has only recently been vested,
Roderick estimates that, in fact, the
would be worth $3,000 a year.
investments could earn 7 percent interest,
so Clarissa would actually earn $42,000 per
At Roderick’s death, annual income would be
year from the invested insurance proceeds.
available from the following sources:
She would, however, have to reinvest $12,000
($42,000 - $30,000) to ensure that the
amount that is to be withdrawn will increase
CLARISSA’S EARNINGS
$25,000
each year to keep up with inflation.
Investment portfolio
$2,000
Roderick’s $600,000 in insurance is a lot
more than a bare minimum of four to five
Survivor pension benefits
$5,000
years’ net income, but he prefers to provide
the family with a higher level of financial
Total
$30,000
security. Now that he has determined how
much insurance he needs, Roderick can
shop for the best policy or policies. A similar
Roderick estimates that in order to finish
analysis should also be prepared to estimate
educating the children while maintaining
Clarissa’s life insurance needs.
his family’s current standard of living and
to provide Clarissa with a fund that would
provide for her retirement, the family would
need about 80 percent of their current
income level, or $60,000 of annual income
($75,000 x 80 percent).
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SHOULD YOU BUY TERM OR
What’s the upshot? Like most things in
CASH VALUE INSURANCE?
our financial lives, term versus cash value
insurance should not be viewed as an either/
For as long as people are buying and selling
or proposition. You may be best served by
insurance, they’ll be debating the merits of
a combination of term insurance to provide
term and cash value insurance. The question
needed protection for your dependents and
is: which kind is right for you, right now?
cash value insurance to provide additional
protection and accumulate tax-deferred
Term insurance is usually cheaper in the
savings.
long run than cash value insurance. If
you’re concerned about providing the most
A Final Suggestion
insurance coverage at the lowest cost now
There’s a lot to do to achieve a better and
and the bulk of your life insurance needs will
more secure financial future, including
eventually diminish, emphasize term.
saving regularly and investing those savings
wisely. Making sure you and other family
Nevertheless, there are benefits to cash
breadwinners have sufficient life insurance
value insurance. People who have difficulty
coverage is no less important. I encourage you
disciplining themselves to save regularly can
to speak with an SBLI representative about
benefit from cash value insurance’s forced
how SBLI can meet your life insurance needs.
savings feature. Even disciplined savers can
take advantage of the tax-deferral feature of
You can talk to an SBLI representative at
cash value life insurance as part of a program
888.438.7254 or chat online at SBLI.com.
for saving for retirement. And in spite of fees
and commissions, some cash value insurance
—Jonathan Pond
products offer attractive, tax-advantaged
returns on the investment portion of the
policy. The problem with trying to meet all
or most of one’s life insurance needs through
cash value insurance is that it can become
prohibitively expensive.
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