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Life insurance demystified: Keeping your family covered

Stepping into an insurance agent’s office or sorting through employee benefit paperwork can be a daunting task. Understanding the options for seemingly endless types of insurance is often overwhelming, so the Herald spoke to the experts to break down the basics of one essential category, life insurance.

“For me anyway, it’s more important to have (life insurance) than to have auto insurance,” says Randy Kottsick a Grand Forks State Farm Insurance agent. “When you think about what you can do best for your family and your loved ones, life insurance is absolutely the best thing you can do.”

That’s why he encourages clients to evaluate their insurance needs regularly.

“You want to look at a life insurance policy when you’re in good health because then the rates … are less expensive,” he says.

How much is enough

His formula for calculating how much insurance a person should have is fairly straight forward.

First, a client would need to determine how much money their survivors would need.

There are quite a few considerations that go into this decision.

Funeral expenses, outstanding debt and future needs of dependents such as living expenses, college tuition and other needs should all be considered.

If there are assets to be passed to beneficiaries, life insurance coverage for estate taxes can also be useful.

If a business is owned, those needs might also need to be calculated, if the business doesn’t have a separate plan of its own.

Kottsick advises clients to subtract their current coverage and any assets that they would want liquidated from the total.

The result is the amount of coverage needed.

Term or cash value

Then a client would need to decide which kind of policy is right for them.

Term life policies can cover nonpermanent needs like a house mortgage, raising children or other debts.

These policies generally do not build any cash value and end coverage when the term expires.

Cash value plans like universal coverage build cash value over time that can be borrowed against for retirement or other expenses, but it takes time to build that value and coverage is limited for the immediate future. At State Farm, cash value plans also are often 30 to 40 percent more expensive than term life plans.

Kottsick compares the plan types to renting and buying. A term life plan is more like renting life insurance because there’s generally no cash value when the term expires, but a cash value plan is more like owning life insurance. It can be borrowed against.

Kottsick says different kinds of insurance work best for different situations, so there is not one best option for everyone.

Consulting with an agent is a good way to figure out which kind of insurance is best for a person’s age, health and situation in life.

Reevaluate regularly

Once need is determined and a policy chosen, the work is not over. Kottsick suggests reviewing all insurance coverage on an annual basis to evaluate if any changes are needed.

He adds that if a major life change occurs, such as marriage, having kids or buying a house, it’s important to update insurance to reflect that right away.

The North Dakota Insurance Department offers additional information on life insurance on its website,