Tailor-made Coverage.

Here's how can insure your life insurance is the proper fit for you

DR. REGINALD BUFORD AND HIS WIFE, DR. DEENA

Buford, have experienced the kind of career growth that many professionals do. "At the start, we had financial concerns," says Reginald, 44, a plastic and reconstructive surgeon in Houston. "Eventually, though, we reached a level where we became more comfortable."

At that point, the Bufords decided to seek expert advice about their financial future, so they consulted Cheryl Creuzot, president of Financial Strategies Group, an estate and financial planning company in Houston. Creuzot met with the Bufords several times, asked many questions and came up with a comprehensive financial plan. As part of that plan, she recommended that the Bufords increase their life insurance coverage to two policies worth $2.8 million ($2 million for Reginald and $800,000 for Deena), a substantial increase from their initial coverage of $200,000. "I had a small policy and Deena wasn't covered," says Reginald. "We decided that we both needed substantial coverage, to protect each other and our three children."

For most people, life insurance is a subject they would prefer not to think about. Thoughts of mortality are never pleasant. "However, if you have loved ones, you probably will want to provide for them, and life insurance may play a key rote," says Solomon C. Hicks, a San Diego-based insurance agent for Prudential Insurance Co. Buying life insurance is not a simple task, but the more you learn about the subject, the greater your chance of finding peace of mind at a fair price.

DECIDING HOW MUCH IS ENOUGH

First, you'll have to decide how much life insurance you need to buy. Instead of relying on some simple formula--six times income, for example--Creuzot employs a sophisticated process to come up with a precise number. "You need to estimate all the cash needs your survivors may have after your death," she says. These include:

* Immediate expenses. How much will your family need for funeral costs? Will appraisers have to be hired to evaluate your real estate, collectibles or shares in a private company? What legal fees are likely to be incurred?

* Debt retirement. Many people wish to give their heirs a debt-free start, so they buy enough insurance to pay off old student loans, home mortgages, auto loans and credit card balances.

* Educational funds, If you have children you'd like to send to college, provisions should be made for future expenses.

* Emergency funds. You might plan to leave your family enough money to live on for three months, for example, in case of unforeseen expenses or emergencies.

* Ongoing expenses. In addition to the above items, your survivors will need money for day-to-day living. If that amount is $4,000 per month, say, or $48,000 per year, you might aim for an overall investment portfolio of $809,476, assuming a 10% annual return plus a 4% inflation rate.

Once you have an idea of how much your loved ones will need in case of your death, you can then determine where that money will come from. Perhaps you have a retirement plan or an investment portfolio in place. You might have a second home that could be sold in order to provide some capital. Moreover, your spouse might be expected to have a certain amount of income after your death. Once you have factored in everything, life insurance can make up any shortfall.

"The entire process can be complicated," says Creuzot. "You have to project how much your invested capital will earn in the future--I often estimate 8% per year--and you need to build in a forecast for inflation, because a family that's spending $25,000 now won't be spending $25,000 next year or the year after. At present, I'm using a 4% inflation rate."

By crunching the numbers as indicated, a financial professional should be able to help you compute how much life insurance you need. You can do your own projections, using a personal finance software package such as Quicken, or by going on the Internet (see chart listing Websites offering life insurance calculations).

Other factors may impact your decision as well. When Bishop Clarence E. McClendon, 33, who heads the Pentecostal Church of the Harvest in Los Angeles, bought life insurance, he wanted to protect his ministry as well as his wife, three children and other family members. "To accomplish all this, he bought two policies," says Hicks, who is McClendon's agent. "One policy will be paid into a trust, with the amount set to provide for his family members, assuming an 8% investment return."

McClendon's other insurance policy is assigned to the ministry. "It's the type of `key person' policy many organizations have for their chief executive," says Hicks. "We bought enough coverage to be able to pay off the ministry's debts and hire a replacement for the bishop in case of his death." McClendon would not identify the size of his policies.

Dr. William A. Jackson, 65, a general practitioner in Detroit, bought $1 million worth of life insurance to benefit the Morehouse School of Medicine in Atlanta because he wanted the school to be able to continue educating physicians who will serve inner-city patients. "No estate plan is complete without charitable giving," says Olin T. Wiley, an insurance agent and owner of Wiley & Associates, an insurance company in Atlanta that specializes in charitable estate planning. He helped Jackson acquire his coverage from the Hartford Life Insurance Co. "Buying life insurance from a top-quality company is a way to make a sizable donation some time in the future with a series of comparatively modest payments," Wiley says.

TYPES OF INSURANCE

There are essentially two varieties of life insurance:

* Term insurance. This is basic life insurance and the least expensive kind you can buy. However, as you grow older, term insurance costs will increase.

You can buy, "annual renewable term," with gradually escalating premiums, or "level premium term," which locks in a rate for five, 10 or even 20 years. Recently, competition among providers has reduced the cost of term insurance, especially for level premium policies. The catch: after the level premiums are paid, you'll have to take another medical exam if you want coverage to continue.

* Permanent insurance. These policies, which include whole life, universal life" and variable life insurance, cost thousands of dollars a year compared to term insurance, which costs hundreds. The additional premiums go into "cash value," a tax-sheltered investment account. As you grow older, and premiums rise, earnings from the cash accumulated can be used to offset these costs. Therefore, these policies are designed to stay in place as long as you live.

Which type is best for you? "Families of moderate means should buy term insurance, which costs less," says Creuzot.

"They generally have little need for life insurance after their children are grown and living independently."

Hicks says that fulfilling your needs comes first: if you require a certain amount of insurance coverage and the only way to buy that much insurance is with a term policy, you should buy term. "Many term policies may be converted to permanent policies in the future," Hicks says. Usually, a policyholder can exercise this conversion right at any time within the first five to seven years, depending on the insurance carrier.

On the other hand, families that expect to leave a taxable estate may want to keep their life insurance in place indefinitely. (Under present law, a married couple can leave up to $1.3 million worth of assets without owing estate tax, assuming careful planning has been done, and this limit will rise to $2 million after 2005.) Life insurance may be used to provide money for estate taxes so other assets can be passed on, intact, to the next generation. "People are living to be 95, or even older, these days," says Wiley. "If they want to be sure they'll always have life insurance, they'll need a truly permanent policy."

The Bufords, for example, each bought permanent life insurance policies. "These policies will serve several roles," says Creuzot. "For now, they offer family protection in case of a premature death. Later, the cash value can be tapped for supplement retirement income, if necessary." Given that the Bufords will have a taxable estate, the policies will provide the necessary estate liquidity to pay taxes at death. In the future, the policies can be transferred to a life insurance trust to remove the policy proceeds from estate taxation. By making such a transfer, the liquidity is available for taxes. However, the proceeds providing liquidity don't exacerbate the estate tax problem.

The Bufords bought variable life policies from Provident Mutual Life Insurance Co. Variable life plans allow consumers to invest their premiums in "subaccounts" that resemble mutual funds.

"We chose variable life insurance for another reason," says Deena, 40, an occupational medicine specialist. "In Texas, such insurance policies are protected from creditors. Doctors are vulnerable to lawsuits, so we decided to do our investing as part of an insurance policy for the extra protection."

WHERE TO BUY

Use a competent agent to help you find the best policy, especially if you have health problems. If you're in excellent health, and particularly if you don't smoke, you may prefer to shop for term insurance on your own. The Websites listed in our chart will provide price quotes from several companies. You can also shop by phone, simply by calling an insurance quote service. (See chart).

James H. Hunt, an actuary with the Consumer Federation of America (CFA), a consumer advocacy organization in Washinton, D.C., advises you to get a computer-generated "policy illustration" from your insurance company or agent before you buy a cash value policy. Contact CFA at 202-387-6121 or www.consumerfed.org and request a Life Insurance Bate of Return Service brochure, which explains the service that Hunt provides (e.g., "rate of return" estimate, a standardized format for comparing permanent life insurance policies). With this analysis, along with Hunt's explanation, you'll know what you're buying before you make any final decisions.