Buying life insurance: choosing the right policy can protect and preserve your assets for your kids without costing their inheritance - excerpted from 'Talking Dollars and Making Sense: A Wealth Building GuIde for African-Americans'

Black Enterprise, Oct, 1997 by Brooke Stephens

Choosing the right policy can protect and preserve your assets for your kinds without costing their inheritance

NO MATTER WHO YOU ARE, MORBID issues like death and dying are totally foreign concepts when you're young and beginning to acquire a few assets. Insurance isn't sexy; you can't drive it, wear it or ear it; and the big payoff doesn't come along until you're gone. Add to that the endless confusion and complexities of the costs and types of policies, and life insurance becomes the most misunderstood area of financial planning.

A 1989 study by the Federal Trade Commission concluded that life insurance is so contradictory that the average consumer, not just the African American buyer, is unable to get an accurate understanding of what he or she is really buying. Most people don't even try to learn the basics.

But the primary purpose of life insurance is and has always been to rake care of your dependents and any family members who rely upon you to have food, shelter and clothing. It goes well beyond paying for the funeral and the cemetery plot. If African Americans are going to build firm financial foundations for their families, a life insurance policy is the best way to prevent financial ruin for a succeeding generation. If you are responsible for the financial well-being of a spouse, children and other family members, then you need life insurance. On the other hand, if you do nor have anyone who will starve to death if you die and leave them without a basic means of survival, then you need to consider buying only enough life insurance to bury you.

SELLING YOU INSURANCE

If you rely on the insurance agent to educate you correctly about what you should buy, you could be making a serious mistake. Insurance agents and financial planners who sell insurance are really salespeople, and they have a built-in conflict of interest. They are there to advise you, but they are also there to earn a commission. The higher the premiums for the life insurance that you purchase, the more money they make, which is why they prefer to sell whole-life insurance--the most expensive insurance you can buy.

Insurance agents will also try to convince you to purchase a policy because it is "a forced savings plan," or a "tax-deferred" savings for college tuition or an "additional source" of retirement income. These arguments sound good, but they are not. That's because there are much more profitable ways to invest your dollars to meet these other financial goals.

Insurance is simply about buying protection for your assets and, more importantly, protection for your family. It is purchased to replace the income stream that you provide to support and care for your loved ones. The death benefit of a policy is to protect your family from economic hardship and deprivation when you are no longer there to provide for them. Nothing more, nothing less.

If you're young, single and childless with no mortgage and no aging parents who depend upon you for support, then skip life insurance. Although a life insurance agent will argue that you should buy it as an investment in your future while you're young and in good health and the rates are low because of your age, forget it. There are better ways to build investment assets for yourself. As long as you have group life coverage available as a benefit in a health insurance plan through your job, that is probably enough to pay your final debts and give you a decent burial.

If you are married and both of you are working, then any group life insurance that you have through your job is still sufficient, especially if you have no children, no mortgage and no major expenses. But for a working couple with two or three children, school loans, future college bills, private school tuition, dental bills, summer camp fees, a mortgage, a car note and lots of credit cards (your typical American family!), the story is different.

A young father with all these financial responsibilities needs more than $1 million of life insurance to meet all these obligations over a lifetime. A single parent should carry at least $250,000 of term life insurance made out to whoever is chosen as the guardian for the children, especially if the guardian is the child's grandparent. Many African American grand parents, as senior citizens with limited financial resources, are finding themselves suddenly left with the unexpected financial responsibility of caring for small children.

HOW MUCH INSURANCE DO YOU REALLY NEED?

A recommended rule of thumb is five to eight times your salary, but that's not carved in stone. It really depends on how many people you support financially and what other resources you have. If your assets are tied up in real estate or a family business that would have to be sold in order for your family to survive, you may need more than that. Your need is based on your personal savings profile, family budget and present net worth.

Once you know how much insurance you need, you must decide which is the best policy to buy. Term? Whole life? Universal life? No matter what names the insurance companies give them--flexible life, adjustable life, conservative life, new classic whole life, convertible premium life, modified life--there are still only two types of insurance policies: term life and cash value. (Whole life and universal life are types of cash-value insurance.)