Life insurance lures: be sure of what coverage you really need

It's 6 p.m. You're just sitting down to dinner, Junior has already spilled his milk, and the TV news is about to announce the verdict in the six-month-long political corruption trial. Then the phone rings. ``Hi, I'm from Guaranty Guaranty Life Insurance Company,'' the caller says happily. If you don't hang up instantly, the salesman may get a chance to tell you about the company's new high-yield, cash-value life insurance policy.

Even with falling interest rates, many companies are still pushing life insurance products with high rates that either can't be sustained beyond the first few months or, if they are kept up, will put the company out of business. At a time when the more conservative and respected companies are offering yields of 9.5 to a little more than 10 percent on the investment part of their policies, some are touting rates in the 11 or 12 percent range.

The most common variety of all these policies is ``universal life.'' It was invented when people were rushing to cash in high-cost, low-interest, whole-life policies for cheaper term coverage so they could invest the difference elsewhere. ``Buy term, invest the rest,'' it was called. Universal life captured nearly 40 percent of individual life insurance sales last year, up from 2 percent in 1981.

It has also captured the respect of some early skeptics.

``I've been a term [insurance] advocate for 20 years,'' says Gary Pittsford, a financial planner in Indianapolis. ``But some of these new universal-life policies do have some aspects that interest me. . . . They used to be terrible. Now they're getting pretty good. For people who need a forced way to save, they help you set money aside.''

Part of the universal-life premium pays for insurance protection, while the rest is invested and the policyholder gets a yield, or interest rate, based on current interest rates and the investment ability of the insurance company.

In it's simplest form, this would be like spending $150 a year for $100,000 of term insurance and putting $350 in a high-yielding money market mutual fund. Instead, you put the whole $500 in a universal-life policy.

But competition stepped in and complicated matters. The advertisements, sales literature, and salespeople themselves sometimes overstate the return on the savings part of the policy by not including sales charges, administrative costs, or redemption fees. Also, the portfolio behind that rate may be heavily loaded with bonds and other securities that could be maturing very soon, which will bring down your yield very soon, too.

This advertised rate is known as the gross rate. ``The gross rate is meaningless,'' says Joseph M. Belth, professor of insurance at Indiana University. ``You don't want to hear about the gross rate. It's the net rate that matters.''

Some states have recognized the gross-rate, net-rate problem and have started making insurance companies explain their products more fully. In Wisconsin, for example, any company advertising a gross rate, sometimes also called the current rate, has to give equal prominence to the guaranteed rate and tell how long it is guaranteed for, says Lou Zellner, a member of the Wisconsin insurance commissioner's staff.

``But we still get a lot of complaints, especially as we see more interest-sensitive products,'' she says. It is possible, she adds, that more complaints may come up as companies try to compete in a declining-interest-rate environment by advertising artificially high yields.

One company offering a realistic rate, says James Hunt, a consultant to the National Insurance Consumer Organization, is USAA Life of San Antonio. At present, the company is paying 10.25 percent on its universal-life product, he says.

Before signing up for universal life, or any cash-value policy, examine your insurance needs. If you can't afford more than term coverage to meet your family's needs, then you can't afford universal life and it shouldn't be considered.

Determining insurance needs is really nothing more than figuring how much money the family would need if the mother or father were to die and where that money would come from.

There are some expenses that would be immediate: funeral costs, expenses for settling the estate, state and federal estate taxes, and any outstanding property taxes or debts. Survivors usually want to pay these off as soon as possible, so there should be resources to cover this.

As for replacing income, remember that insurance isn't the only source. If a father dies, his widow and children are automatically eligible for social security benefits. Of course, this won't be enough to live on at the same level as before, but it can reduce the amount of insurance you need to pay for.

Social security survivors' benefits are partly determined by your age and the amount of years you have worked, as well as the size of your family. A social security office near you should be able to tell you how much your family would qualify for if you died now. Also, if your company has a benefits specialist, he may have this information.

For example, say a father was born in 1950, had worked every year since he was 22, and had a wife and two children. Should he pass on, his family would receive about $16,000 a year from social security until the first child became ineligible, which would be at age 18, or at age 19 if the child was still in high school.

Also, you may not need to buy as much insurance if your employer is providing two or three times your salary as a group-insurance benefit.

If the surviving spouse isn't working, he or she may plan to reenter the work force. After figuring in any extra child-care costs, the added income further reduces your insurance needs.

In figuring survivors' living expenses, you will probably decide to start with enough insurance to pay off the outstanding mortgage on your house, as well as those funeral expenses, estate costs, and outstanding debts.

For most people, all this means buying at least $100,000 worth of life insurance. According to Mr. Pittsford, Bankers National Life of New Jersey would charge $127 to give a 35-year-old nonsmoking man this coverage under a basic term policy the first year. The next year, the rate would drop to $81 because of reinvested dividends, but then start climbing again to $94 in the third year, $106 the fourth year, and $114 the fifth.

If, after all your calculations, you decide you need $200,000 of coverage (it's cheaper to buy in multiples of $100,000) and can't afford to pay much more than $254 in premiums, then stay with term and don't bother with the cash-value policies. For more information on the various insurance products and help in deciding how much you need, see a book by Professor Belth, ``Life Insurance, a Consumer's Guide.'' For a paperback copy of the second edition, send $12.50, plus $2.50 for shipping and handling, to Indiana University Press, 10th and Morton Streets, Bloomington, Ind. 47405.