May 01, 2009

Life Insurance: Big Bang for your Estate Planning Buck

Before I had kids, I thought that life insurance was a boring thing that only other people had to think about. But I was wrong about that. Turns out that life insurance is actually one of those old-fashioned financial products that makes a ton of sense. (Believe it or not, some of them actually do.)

Of course, there are lots of complicated life insurance products out there, too, but for estate planning purposes, term insurance makes the most sense.

Here's how it works: You sign a contract with a life insurance company. You agree to pay them a monthly premium and they agree to pay your beneficiaries a certain amount if you die during the term of the contract. That way, if you get hit by a bus unexpectedly, your loved ones will be provided for.

A twenty-year term policy is perfect for families with young children. You'll lock in a low premium rate for the entire twenty years. And in these days of job insecurity, having a policy outside of whatever your employer offers is a good idea -- even if you do get laid off, you'll still have a policy in place to make sure your family enjoys financial security.

And term insurance is surprisingly inexpensive. The insurance company is betting that you're likely to survive the term of the policy, so their premiums are generally lower than insurance that lasts your entire life (which is sure to be paid out in the end). The younger you are, the less it will cost, so don't put it off for better times.

The New York Times just published a great overview of insurance that you can read to learn more. The Motley Fool has a lot of helpful calculators to help you figure out how much to buy. And to compare rates online, term4sale.com makes it easy to type in your zip code, age, and health history to get an idea of what your policy is likely cost.

To learn more about life insurance as a part of your estate planning, see The Mom's Guide to Wills & Estate Planning, by Liza Hanks (Nolo).