Feb. 6, 2007

COLLEGE STATION - Automobile insurance, which is required by state law, helps cover drivers in case of crashes. Health insurance is important because it helps cover the cost of medical care.

But life insurance? Is it necessary? And what is it exactly, since every life will eventually end?

To put it simply, life insurance is a way to help manage financial risks, said Texas Cooperative Extension experts. No, it's not a necessity for everyone, but some individuals and families can benefit from having coverage.

"There are several purposes for life insurance," said Dr. Joyce Cavanagh, Extension family economics specialist. "Probably the No. 1 is to replace income if someone dies."

Although a life insurance policy probably won't replace all of the family's lost income, "adequate life insurance can help supplement the income needs of the household to some extent," added Nancy Granovsky, Extension family economics specialist

Life insurance policies can also help pay off mortgages or estate taxes after the policy owner dies, Cavanagh said.

"And some people buy life insurance because they want to leave a chunk of change in a bequest to a family member, charity, institution or someone else," Granovsky said.

But most of the time life insurance is purchased to provide a financial cushion for a family in case the main breadwinner dies, especially if the family has young children or other dependents, the experts said.

Most life insurance can provide that cushion only if "the policy owner has continued to make premium payments or has a paid-up policy," Granovsky said.

Keeping that warning in mind, life insurance can be a good way to relieve money worries for anyone who will leave behind financial dependents who have no other way of eliminating debt in case of death of the main breadwinner, she said.

Life insurance comes in two basic forms, Cavanagh said: term and whole life, also known as cash value.

"Term (insurance) provides coverage for a certain number of years," she said, adding that coverage can be renewed.

Whole life insurance, on the other hand, not only provides coverage but also carries a certain amount of cash value that policy holders can borrow against if they wish, Cavanagh said. Because of this, whole life insurance has higher premiums than term.

Cost of the premiums should be a consideration when shopping for a policy, but not the only one.

"Premiums have been falling for term insurance for several years now," Cavanagh said.

Because so many people don't really go shopping for life insurance – determining what is available and what works best for them – but are sold policies by agents who seek them out, "one of the common things to happen is they end up purchasing a whole life policy," she said. "For young families with lots of need, this often results in an inability to afford the level of coverage they really need because the premiums are so much higher."

To reverse this, consumers need to take charge by researching which policy is right for them rather than allowing someone to sell them a policy they weren't aware they needed, the experts said.

Who needs life insurance?

"Ask yourself: Is anyone economically dependent on you for their livelihood?" Cavanagh said. "If the answer is yes, you probably need to purchase life insurance."

But even that advice has qualifications, she said.

"Some people have someone economically dependent on them but have enough other sources of income (that they) won't need substantial life insurance."

How much life insurance is enough?

A good rule of thumb, Granovsky said, is to have a policy worth $500,000 to $1 million. That may sound like a lot of money, but consider everything that will have to be provided for if the family breadwinner should die.

If that's too much to consider, she said, do your homework. Figure out the dollar amounts of all lost income and projected income, debts including mortgage payments, planned college costs, cost of living increases, retirement benefits, anticipated interest rates, assets and any other foreseeable costs.

That is a lot of work, the experts said, but the Texas Department of Insurance's publication, "Understanding Life Insurance," found on its Web site at http://tdi.state.tx.us/ , provides basic information for consumers.

Granovsky also recommends "Insure U," a "get smart about insurance" Web site sponsored by the National Association of Insurance Commissioners. The site, located at http://www.insureuonline.org/ , features insurance information for various life stages, she said.

They also recommended seeking out reviews of life insurance periodically found in Consumer Reports and the Web site of American Council for Life Insurance ( http://www.acli.com/ ) for definitions of terms and trends.

For many people, "life insurance meets a critical need,"Granovsky said, and consumers should know where to look for expert help.

"Insurance professionals are prepared to help people find ways to manage their risks in life and this is one of them."

For more information on family financial issues, visit Extension's Family and Consumer Sciences Web site at http://fcs.tamu.edu/ and click on the link to "Money."