Q&A on Life Policies

These are our baby steps! But are they the right ones? It can be hard to relate to some of the higher income advice when our discretionary budget is still pretty tight. Could we be using these small (but significant to us) expenditures in a better way?

A: Yes. To do that, you need to stay away from insurance agents--at least the one who's been visiting you lately.

Mortgage insurance and life insurance for children rarely make sense. Mortgage insurance is typically more expensive and offers less coverage than comparable term life insurance. As for the kiddies, your agent probably dazzled you with creative projections showing you how rich your offspring could be if you started buying life insurance for them now. But she or he was probably talking about some form of cash-value insurance--'permanent" insurance in your words--that has an investment component that could be borrowed against in future years. Term life insurance would only pay off if your children died, and that would hardly be helping them get ahead.

Given your limited resources, you should be concentrating on securing your own future and retirement, not laying up riches for your kids. You are starting fairly late, so you probably need to start saving aggressively in any available retirement plan. Your state jobs may provide some pension benefit, but it could be limited by the relatively short time you've been employed there.

Because your children are still dependents and the mortgage isn't paid off, you probably also need term insurance for yourself and your husband. First check to see how much is offered through your jobs, and then use the life insurance work sheet at http://www.latimes.com/insure101. Once you've figured out how much you need, you can shop around for a policy that fits.

If it comes down to a trade-off between retirement and life insurance, remember that you are much more likely to reach 65 than you are to die before then; it's even less likely that both of you would die at the same time. Make your plans accordingly.

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Q: I had always heard that the cheapest way to buy life insurance was through your employer. But after spending some time on the Internet getting comparative quotes, I found that my group term life insurance at work is costing me at least twice what I would pay for a 20-year individual term policy! What's the deal?

A: Remember awhile ago when I said there were no real rules of thumb in personal finance? Here's a classic example.

Typically, term life insurance through an employer is a good bet. It's almost certainly the best bet if you smoke, are overweight, have any health problems or engage in scary hobbies such as skydiving.

But what you're buying is usually a one-year policy that's priced based on your employee group as a whole. If you're younger, in better health or working at a less dangerous job than your average co-worker, you may be paying more than you would with an individual policy.

The coverage is also temporary; you could lose it should you leave your job. While your employer's insurer must offer to convert your coverage to an individual policy, the cost and terms may not be to your liking.

If you opt for buying coverage on your own, you'll probably have to pass a medical exam. Also understand that the rate you were quoted on the nifty Web site could be adjusted up (or down) based on factors that weren't included in the one-size-fits-all Internet survey.

Finally, make sure you deal only with top-rated companies. The last thing you want is an insurance company failure complicating your life.

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Q: I am a 32-year-old attorney with a wife, two children and my own law firm. I am in the process of setting up some form of employer-funded retirement plan and my insurance agent (and family friend) is telling me I should buy variable life insurance. The way I see it, variable life insurance is silly because your investment is with after-tax dollars and, to make matters worse, part of your "investment" is used to purchase a term insurance policy (at higher rates than I'm paying now) with the rest put into a captive mutual fund. While I have pretty much convinced myself that variable life insurance is not for me, my wife, who trusts the agent, thinks I don't understand the product and says our friend would not steer us in the wrong direction. What do you think?

A: I think even the best-intentioned insurance agents can get excited about a product and not realize that it isn't the best fit for a client. Less well-intentioned agents might care more about the commission than about making sure you get something that suits your financial needs.

Variable life insurance--a life insurance policy that combines a death benefit with an account that can be invested in stocks, bonds and cash--can be a reasonable, if relatively expensive, option for high-income people who need life insurance and who have already exhausted other tax-deferred ways of saving for retirement. That means people who have contributed every dollar possible to a 401(k) or other retirement plan at work and invested $4,000 a year ($2,000 each for themselves and their spouses) into a Roth IRA--and who still want to save more.