Term life policy is good safeguard

Q: I have a $1 million life insurance policy on me and a $250,000 policy on my stay-at-home wife. We have a 5-year-old daughter, and I purchased my life insurance while my wife was pregnant. My annual salary has increased significantly in the past six years (from $90,000 to $140,000), so I was looking at adjusting my amount of coverage.

My recent Social Security statement shows that my survivor benefits for my wife and daughter would be $1,700 each, or $3,400 a month total.

It seems to me that they would be eligible for this money as long as my daughter is a minor. Is this correct? Should this factor into my life insurance planning? Is term insurance best?

A: Congratulations on your raises. An average increase of 9 percent a year certainly exceeds the average raise in this economy. If you are purchasing life insurance to provide financial protection for your family in case you should die prematurely, it makes a lot of sense to include your Social Security survivor benefits in your planning.

If you were to die now, your daughter would receive a deceased worker's child benefit until age 18 if she remains unmarried (age 19 if she is still in secondary school). She would receive more than $250,000 (13 years at $1,700 per month).

Your wife would receive a widow's benefit as long as she is taking care of your daughter until your daughter reaches age 16. (If a deceased worker has children under 16 from a previous marriage and the ex-spouse is taking care of them, they are also eligible for a widow or widower's benefit.) When your daughter is 16, your wife's survivor benefit will stop unless, at that time, your wife is 60 or older.

Benefits should be applied for promptly: They begin when applied for, not from the time the worker died.

If your wife begins working after your death and she is younger than her full retirement age, her widow benefits may be reduced, even if she is taking care of your young daughter. In 2008, if she earns more than $13,560 (the amount is annually indexed to inflation), her benefit will be reduced $1 for each $2 earned over that amount. It's sad that a surviving parent who has to either continue working or begin working outside the home to meet expenses will see the benefit reduced and perhaps eliminated.

But if you have adequate life insurance, she shouldn't need to work outside the home in the event of your untimely death.

Term life insurance is almost always the best choice for pure protection. Everyone with loved ones dependent on their income should purchase term life insurance. Term life insurance is inexpensive because statistics show the odds are, you won't die while you own it.

Most term policies end at age 65 or 70. As you get older, life insurance needs should decrease unless you have a high net worth and are concerned about estate taxes. Annual renewable term insurance at the 5-, 10-, 15-, 20 and 30-year-level premium/death benefit term and decreasing term are the main types. I prefer level premium term policies. You may pay a bit more in the first years, but you gain peace of mind. There is no worry about future medical underwriting, and you know what to budget.

Chose a sensible coverage period. For your situation, a 20-year level term policy will provide the protection you need until your child completes college.