How to get the best deal in life insurance

Q: I'm married and recently had my first baby. I'm on a budget, but I was hoping to buy life insurance to protect my family. Do you have any tips on how to get the best life insurance policy?

A: First, let me congratulate you on your new baby.

When it comes to life insurance, it is unnecessary for most single people. But with a spouse and a family, your decision to get coverage is a smart one. The key to picking the right policy is to figure out how much support — in dollar terms — your dependents would need if something happened to you, then go out and buy that coverage at the most cost-effective price from a top-rated insurer. It can be a pretty tough maze to navigate, so let's take it step-by-step.

Step One: Figure out how much you need. The standard line from the industry is four to six times your income. Wrong! Rules of thumb like this just don't work. That's because there are too many variables. For instance, the financial reality for someone who has a spouse who could return to the workforce is very different from that of someone who doesn't. To figure out how much insurance you really need to buy, you need to use a pencil and paper or one of the many worksheets available on the Web and run the numbers. You need to know how many years of support you want to ensure with the insurance payout and what big-ticket items (like a mortgage or college) you'd want paid off immediately. And you also have to ask yourself whether the coverage is meant to be a stopgap measure for your family until your spouse or kids can support themselves, or whether it will become the income-generating annuity they live on.

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Step Two: Shop around for coverage. Since you're on a budget, I would recommend term life insurance. This is the simplest form of life insurance – you buy a certain amount of coverage for a certain amount of time. Other forms of life insurance, such as “whole life” and “cash value,” have more complicated formulas that make comparisons more difficult and tend to cost more in the long run. Term life is the cheapest way to get a lot of coverage for the least amount of money. Begin your search on the Web at sites like ReliaQuote (www.reliaquote.com) and Insure.com (www.insure.com). Search engines like these allow you to compare quotes from hundreds of different companies.

Step Three: Check the ratings — and buy. Before you make the actual purchase, make sure any insurer you're thinking of patronizing is on solid financial ground. That means it should have a rating of A or better from Standard & Poor's, Moody's Investors Service, or Weiss Ratings. Many of the insurance search engines on the Web (like those above) give you the rating along with the price. (By the way, before you sign on the dotted line, the insurance company will require a physical exam. Typically, they send a doctor to you to perform an EKG, take a little blood, and listen to your ticker — don't worry, I've done it and it's not that bad.)

Jean Chatzky’s Bottom Line
This week: Who should use a rewards card?
Whether it's cash-back, airline miles, or savings for college, credit cards that offer rewards have their appeal. After all, who doesn't want to get paid to shop?  Unfortunately, rewards cards are not for everybody.

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Who should avoid rewards cards? If you tend to carry a balance from month to month, rewards cards are not all they're cracked up to be. That's because they tend to have higher rates than regular credit cards. The money you pay out in interest will essentially wipe out any of the rewards you earn.

Who should apply for rewards cards? If you pay off your balance each month, rewards cards are worth considering.

Jean Chatzky is the financial editor for “Today,” editor-at-large at Money magazine and the author of “Talking Money: Everything You Need to Know About Your Finances and Your Future.” Copyright ©2004. For more information, go to her Web site, www.JeanChatzky.com.

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