A Suze Orman exclusive

A Few Words of Caution
Always remember this. If you currently have a universal, whole life, or variable life insurance policy that you want to cancel and replace with term insurance, make sure you have the new insurance in place before you cancel your current policy. Why? Because if you cancel any insurance policy and then have the expected replacement policy reject you because you are not healthy and therefore no longer insurable, believe me, you will sorely regret your haste.

And if, for whatever reason, you decide you no longer need any life insurance at all, for goodness sake, don't cancel your policy until you've had a thorough checkup with your doctor to make sure you are 100% healthy!

Also, when buying life insurance of any kind, please make sure that you understand the estate tax ramifications of having a large life insurance policy in your name. While it is true that any amount of money passing from one spouse to another is estate tax free, that is not true for friends or any other member of the family.

Let's think about those unfortunate parents in Connecticut we talked about a bit earlier. Assume they each had a $2,000,000 term life insurance policy and were the primary beneficiary on each other's policy - with their child as the secondary beneficiary on both policies. When the parents died, the child would get the entire $4,000,000 payout, but because the beneficiary is a child and not a spouse, the entire death benefit is subject to the estate tax limit. In this case, the estate tax could be almost $2,000,000. So the parents were actually paying for an insurance policy that helped Uncle Sam as much as their child.

One way to protect your insurance death benefit from estate taxes is to hold the life insurance policy in an irrevocable life insurance trust. That way, it will not be included in the estate of the deceased, and therefore no estate tax will be levied, regardless of who gets the death benefit.

Disability Insurance
Next up, we need to talk about what happens if you find yourself unable to work. This is where disability insurance comes into play. Check what sort of coverage your employer may provide, but I would also recommend shopping around for your own policy. Aim for a policy that will replace at least 70 percent of your income. And make sure you read the fine print. You want a policy that covers you for "owner's occupation." This means your policy kicks in if you can't return to your old pre-accident job. That's a lot better than a policy that only provides coverage if you are unable to hold down a job in "any occupation." Also insist on a policy that is "guaranteed renewable." This means your insurer can't cancel the policy on you as long as you keep up with the payments. And finally, ask about the "elimination period." This is the amount of time that must lapse after your injury or illness before your policy would start to pay you a benefit. Two months is typical.