No life insurance? It could be costly

It's not that Andrew and Claire Langseth didn't want to buy life insurance. What parents wouldn't want to protect their children in case the unthinkable happened? But they started their family when Andrew was in college.

"We didn't really have a steady income. [Life insurance] wasn't something we were going to add to our financial commitments," Andrew, 26, said. Today, for the associate pastor from Stewartville, Minn., with four young kids, the money for life insurance still isn't there.

The economic downturn pushed life insurance down the list of financial priorities for many American families. Ownership of individual life insurance has hit a 50-year low, according to a 2010 study by Limra, an insurance industry-funded research group based in Windsor, Conn. Today, nearly a third of U.S. households, nearly 35 million, have no life insurance.

Sadly, 11 million of those households have minor children. Four in 10 of those families with kids say they'd immediately have trouble paying the bills if the primary breadwinner died. Another three in 10 said trouble would set in after several months.

You can't fault a family for forgoing insurance when living on unemployment or struggling to pay the mortgage. My issue is with the perception that life insurance is unaffordable. A healthy young parent can buy a term insurance policy for the cost of a couple of pizzas per month.

A $250,000, 10-year term policy for a non-smoking, healthy, 35-year-old male would cost about $140 per year, according to figures provided by Jeff Tegeler, a part owner of Garrity, Tegeler and Varley Wealth Strategies in Minneapolis. For $350, that father could buy $1 million of coverage -- less than the cost of a year's worth of cable TV. Put in those terms, can you honestly say you can't afford life insurance? Of course, cable is more fun than life insurance, but I've heard the stories of too many young widows to subscribe to the philosophy that "it can't happen to me." The prices for women tend to be slightly less. Term insurance offers protection for a set period of time. Twenty- and 30-year term policies, which make sense if your children are younger, cost more. Whole life insurance has cash value and is designed to last for life.

What to buy

But Scott Witt, a former actuary for a large insurance company who now provides fee-only insurance advice from his office in New Berlin, Wis., said that people buying small amounts of coverage are almost always better off following the axiom to buy term insurance and invest the difference. On a cash value policy of $200,000 or less, "the savings account portion is going to have a horrible rate of return .... It's going to take years and years before the cash value exceeds the sum of your premiums paid," Witt said. This is coming from a guy who isn't anti-whole life -- he has a lot of his personal wealth tied up in cash value insurance. But he thinks that the majority of whole life policies stack the deck against consumers.

Then there are the policies offered through your employer. It's open enrollment season, and employers may offer supplemental life insurance that employees can purchase on top of the free life insurance that a company may automatically offer a worker. "But don't assume that those are the best rates," Tegeler said. "The very healthy are to some extent subsidizing the less healthy people." Shop around before signing up. You can get a quick idea of insurance premiums at a site such as www.insure.com. You can learn more about life insurance at www.lifehappens.org, a consumer site run by a nonprofit group created by insurance professionals.

The LifeBridge program

The Langseths eventually did get insurance through a unique program offered by MassMutual. The LifeBridge program offers low-income families free $50,000 term policies to pay for education expenses in the event of a parent's death.

A survey of local insurance companies and a call to Limra did not turn up similar pro bono policies.

The program's goal is to give out 20,000 policies, or $1 billion in coverage, to qualifying families. So far it has given out more than 11,400 policies -- 34 of them in Minnesota -- and paid out on 13 claims.

MassMutual emphasizes that it is a philanthropic effort -- insurance agents are discouraged from selling products to LifeBridge participants. Parents ages 19 to 42 who earn less than $40,000 and can pass a physical are eligible.

For perspective, that healthy 35-year-old male would have paid between $80 and $150 for a similar term policy on his own. For more information about the LifeBridge program visit www.massmutual.com and search for "Lifebridge."