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Federal Employees News Digest : Sept. 24, 2012
September 24, 2012 Vol. 62, No. 11 7 Visit us on the Internet at www.FederalDaily.com This second of four columns discussing federal employees and life insurance discusses how much life insurance coverage employees should buy, some strategies for buying life insurance, and how often employees should review their life insurance coverage. The general recommendation from the life insurance industry is that an individual buying life insurance should make sure to buy "enough" life insurance. But there is no simple answer as to how much insurance is enough. Some finan- cial planners say an individual needs enough insurance to replace five to eight years of the individual's gross salary. But those individuals who have young children, a mortgage and other debts such as student loan debt may want to have as much as 10 years' worth of their gross salary in life insurance coverage. That would mean an individual earning $80,000 a year should have anywhere from $400,000 to $800,000 worth of life insurance coverage. One of the main purposes of life insurance is to replace one's income in case the insured dies. The life insurance proceeds would be paid out at the insured's death, allowing the insured's dependents to maintain their current lifestyle by using the insurance proceeds to pay their bills. Other factors to consider in determining the amount of life insurance is whether the surviving partner or spouse will have child-care expenses if the partner or spouse is deceased. Another consideration: Are there any other assets---for exam- ple, a CSRS or FERS survivor annuity---that the surviving partner or spouse can draw on to pay day-to-day expenses? These and many other factors can influence the decision on how much life insurance coverage an individual may need. Once the amount of life insurance coverage an individual needs is decided, then the next step is to buy a policy. Some considerations for buying an individual life insur- ance policy Life insurance is a highly competitive business in which the sales force depends almost entirely on commissions. Insurance companies pay rather generous commissions to agents who sell whole life insurance policies. Perhaps as much as 80 percent of a whole life policy's premium goes to the sell- ing agent as a commission. While selling a term life insurance policy may result in the agent receiving the same 80 percent of the first-year premium, selling a whole life policy nonetheless will result in a larger commission. This is because the whole life premium for the same amount of death benefit that a term insurance policy provides could be five to 10 times higher than the term policy premium. Agents typically make more money selling a whole life policy than they do selling a term policy. It is not surprising that many life insurance agents push whole life policies as a means of increasing their income. If whole life policies were entirely beneficial to the individuals who buy them, then the story would end here. But the vast majority of federal employees do not need any type of cash value or permanent life insur- ance and should instead buy term life insurance policies. In the past, individuals could not purchase term policies with level premiums for periods of more than 10 or 15 years. But today individuals can find insurance companies offering 20-, 25- and 30-year level-premium term policies. Many in the life insurance industry will argue that cash value policies---especially whole life policies---are superior because the insured can keep the policy their entire lives and build up cash value in these policies which then can be borrowed. While this is true, the insurance industry will usually not inform potential buyers about the high fees and commissions associated with whole life insurance, as well as the surrender charges if the insured decides to cancel the policy within the first 10 years of ownership. The result is little cash value if the policy is canceled within the first 10 years of ownership. With the proliferation of alternative ways for saving for the future, including the Thrift Savings Plan and IRAs, using a whole life insurance policy to build one's savings tax-free is no longer that attractive. The TSP offers tax-advantaged sav- ings with no commissions paid to anyone and offers complete portability---the ability to transfer to other tax-advantaged savings vehicles, such as IRAs. Employees should therefore concentrate on buying cheaper term life insurance, and with the money they are saving in premiums, are encouraged to invest these savings in the TSP and IRAs. How often to review a life insurance policy Employees should review their life insurance coverage at least once a year. If they have a major life event, they should contact their insurance agent or company representative. Life events include: (1) marriage or divorce; (2) a child or grand- child who is born or adopted; (3) significant changes in one's health or that of a spouse/domestic partner; (4) purchasing a new home; (5) refinancing one's home; or (6) coming into an inheritance. Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in Silver Spring, MD. He is also a registered representative with FSC Securities Corporation, branch address: 833 Bromley St. - Suite A, Silver Spring, MD 20902. Phone: (301) 681-1652. Securities offered through FSC Securities Corporation,member FINRA/SIPC. EZ Accounting and Financial Services and FSC are independent companies. Informed Investor Evaluating life insurance needs and coverage: Part II
Oct. 1, 2012