Makeover: switching to supercheap term life

Kiplinger's Personal Finance Magazine, July, 1998

With a 4-year-old daughter, Tarrah, another child on the way and 28 years left on their mortgage, Deena and Robert Stuart, both 26, of Arvada, Colo., need plenty of insurance. But with a household income of less than $50,000, they also need to be frugal. LIFE INSURANCE. The Stuarts could cut their life insurance costs in half by switching policies--from two $150,000 annual renewable term policies that will gradually convert to whole-life starting next year (cost: $720 per year) to supercheap 30-year level-term insurance that will last until their kids graduate from college and they finish paying off their mortgage. Robert could get a $150,000 policy from First Penn-Pacific for $202; Deena's would cost $163 (see "Surfing for Policies," on page 88). Savings: $355 in the first year. They'd save even more each year after that because their old policy's premium is scheduled to increase.

AUTO INSURANCE. The Stuarts have been smart shoppers for auto insurance on their 1995 Ford Escort and 1985 Ford Bronco. We couldn't find any policy cheaper than their Liberty Mutual policy, at $716 per year. All state, Geico, Hartford, Prudential and USAA were others that charge less than $ 1,000 for their current coverage. And the Stuarts chose their deductible wisely--$1,000 for comprehensive and collision on the Escort. (They waived that coverage on the Bronco.)

HOMEOWNERS INSURANCE. The Stuarts also have a good deal on their homeowners insurance, paying $398 per year for their Liberty Mutual policy. They might be able to save if an agent appraises their home. They're currently insured for their house's market value, but they need to cover the house's replacement value, which could be almost $20,000 less based on square footage and local construction costs. Savings: $44

REDIRECTING THE SAVINGS. The Stuarts could apply that $44 toward raising their auto liability coverage. Their current limits--now barely above the state minimum at $25,000 per person/$50,000 per accident/$25,000 property damage--are way too low. Destroy one new Lexus and they could be $20,000 in the hole. It would cost the Stuarts $105 a year to raise their liability coverage to $100,000/$300,000/ $50,000 on both cars and another $66 to increase the uninsured-motorist coverage to the same level.

The Stuarts can use their life insurance savings to buy disability insurance for Robert, an accounting clerk whose income is essential to the family but who doesn't have coverage through work. Robert would pay $389 per year for a Provident policy that provides a $1,650 monthly benefit, after a 90-day waiting period, up to age 65. He'd receive benefits for two years if he were unable to perform his own occupation and wasn't earning money in any other occupation. After that, he'd receive benefits only if he were unable to perform any job related to his education and experience.

Robert could knock about two-thirds off that price if he bought Provident's new accident-only policy, but the benefits would be much smaller. For $136 per year, he'd get $1,125 per month for up to three years (after a 90-day waiting period) if he became disabled because of an accident. If he became disabled because of a specified illness, he'd receive a $14,000 lump sum instead.

Deena--who opened a day-care center in her home less than a year ago--would have a tough time getting disability coverage until her business produced steady income. But she should invest in liability insurance for her business. It costs $2,000 to $4,000 per year for up to $1 million in coverage, estimates Troy Sibelius, an independent agent in Denver.

If you already have group disability insurance at work, that could be enough. Group disability policies typically pay 60% of your income after a 180-day waiting period. Benefits are taxed if you employer paid for coverage.

If your employer doesn't provide group coverage, or it wouldn't be enough to make ends meet, you should buy an individual policy. Such policies can generally bring your total coverage up to 80% to 90% of your take-home pay, says Jeff Sadler, author of Disability Income (National Underwriter, $19.95; 800-543-0874). Individual policies usually have a shorter waiting period than group policies (90 days is common). You aren't taxed on the benefits because you paid the premiums yourself, and you can keep the coverage if you move to another job.

HOW TO GET A GOOD DEAL. See whether your employer lets you buy an individual policy at a group discount. These policies usually cost 15% to 25% less than individual policies, says Unum's Michael Norton, and may cost as much as 50% less for women because group policies have unisex rates (women are usually charged more than men for individual disability policies).

The most difficult part of shopping for disability insurance is comparing what the policies cover. No two are exactly alike. Most important, look at how the company defines disability. Own-occupation policies pay benefits if you're unable to perform your occupation (usually for people with highly specialized education and training). Any-occupation policies pay only if you can't perform any occupation related to your education and experience. Most switch from one definition to the other after you've been making claims a few years. And they usually offer partial, or "residual," coverage--that is, benefits if you return to work part-time. The longer the residual benefit, the better.