Buy Young

By Emily Lambert

In the wake of the recession only 44% of American households have individual life insurance, a half-century low. Fewer still have disability insurance. If you're uninsured or haven't reviewed your coverage recently, here's a reason to get moving: You're the youngest now you'll ever be, and as you age the cost of coverage will only rise. "A 35-year-old male is going to pay less than a 36-year-old male," says Mark Maurer, president of brokerage Low Load Insurance Services.

Here's how to get started.

Find your family's number

Insurance agents are fond of citing multiples of annual income that people should try to replace with life insurance. But what matters is your own family's needs. "The key question is ‘Who suffers if this person's income is gone?'" says William Wixon, a certified financial planner in Maple Grove, Minn. In fact, Wixon occasionally advises his older clients to let their life insurance policies lapse.

Young parents, by contrast, generally do need life insurance. But situations differ. Two highly paid professionals might be able to raise their kids just fine on one of their salaries, while a stay-at-home spouse needs extra protection should something happen to the sole breadwinner. Estimate what your survivors would need to cover future bills, including a mortgage and the rapidly rising cost of college. Then subtract your spouse's expected earnings, plus death benefits your family would receive from group life insurance policies, Social Security and other sources.

Pick a product

Life insurance comes in two main flavors, with many variations. The simplest and cheapest--and the best for most young families--is term insurance. With term you pay premiums for a number of years set at the outset. In exchange the underwriter agrees to pay a death benefit to your beneficiaries if you die during that term. Outlive it and your heirs get nothing.

Term carriers compete fiercely on premiums, and you pay only for what you need for as long as you need it (say, until your kids are grown). If this strategy appeals to you, look for "level" premiums for which the annual cost is fixed for the life of the policy--say, for 10 or 20 years. A 40-year-old woman could get a $1 million, 20-year level term policy for as little as $540 a year.

The other flavor, permanent insurance, is far more expensive and can be mind-bogglingly complex. The advantage is that it stays in force and pays off when you die. Permanent (whole or universal) policies can also work as a sort of forced savings plan. That's because, over time, they build up a cash value that you may be able to tap into or use to reduce premiums when you're older.

Still, view with skepticism broker pitches of permanent policies as great tax-deferred investments. Often they aren't, due to high fees, mandatory contributions and withdrawal restrictions. Moreover, a significant portion of permanent policyholders stop paying premiums, forfeiting some or all of the cash value they've amassed over the years and even the death benefit.

Permanent policies tend to make the most sense for those whose assets will be subject to federal and/or state estate taxes when they die or who want to generate cash at their deaths--for example, so a family business can go to one child and cash to another. But if estate planning is a concern, first consult an attorney or fee-only financial planner who doesn't earn life insurance commissions.

Unsure of whether you want permanent coverage? You can keep your options open by buying a term policy that can be converted into more expensive permanent insurance based on your health status at the time your policy was originally issued.

http://www.forbes.com/forbes/2011/0627/money-guide-11-insurance-life-disability-policies-buy-young.html