Personal Portfolio

A guide to choosing the life insurance that's right for you

The last time you thought about insurance was probably when your shifty second cousin tried to sell you a fabulous policy that everyone had to have.

Let's face it, insurance is one of those things that nobody wants to think about or spend any money on--except when it's absolutely essential. But how do you know what's essential?

We asked two financial experts (neither of whom earns commissions by selling insurance products) for advice for entrepreneurs in four situations representing different stages of a company's--and a family's--development. Glenn Daily is an insurance consultant based in New York City; Roy Ballentine is a financial planner based in Wolfeboro, N.H. (For simplicity's sake, we steered clear of health insurance and property-casualty insurance.)

STAGE 1: You're the 25-year-old owner of a start-up company--still in the red--with no outside investors. You're also single and the proud possessor of virtually no assets.

Daily: I'd be hard-pressed to see any reason at all for you to buy life insurance. After all, nobody's dependent on you, and you don't have any investors to worry about.

Ballentine: The important coverage to shop for now is disability insurance--but only if you're able to pay yourself a fairly regular paycheck. The cheapest route is to set up a group policy through your company, which you can do with as few as 2 to 10 employees. If you're on your own, join an association that offers group coverage to its members. Either way, the cost will be deductible to your company, and you'll be able to protect about 60% of your income.

STAGE 2: You're 36 and the owner of a growing (and increasingly profitable) company, with support from a few angel investors. Married, with two young children, you also own a house, a car, and a few small investments.

Daily: Now that you've got a family, life insurance makes sense. The most economical way to go is with a term policy. To figure out how much insurance you need, make a list of your "after death" goals--being sure there's enough money for your kids' college tuition, for example --and try to quantify how much it would cost in today's dollars to achieve them. Then estimate whatever assets your family would have after your death, including Social Security benefits and any equity in your home. Subtract the second number from the first to see how much extra you'll need.

Ballentine: Besides purchasing your own life-insurance policy, it might make sense to have your investors buy coverage on you, too. Some entrepreneurs have their companies purchase the insurance to cover their investors' expected returns, but the problem is that once the death benefit passes into the company's coffers, it's subject to the claims of all corporate creditors. Meanwhile, disability insurance is more important than ever. Assuming your salary is higher than $50,000, it's time to supplement your company's group plan with extra personal coverage for yourself.

STAGE 3: You're 45 and your company is so successful that an initial public offering seems almost within reach. The good news: your salary is high, and you own a vacation home as well as some attractive investments. The bad news: you'll have to face two sets of college tuition within a few years.

Daily: Until you do reap a windfall from an IPO or selling your company, you might still need life insurance to cover particular financial needs like college. Rely on the same calculation I described earlier to figure that out. As your company becomes increasingly successful you should start thinking about estate planning. You'll need to sit down with your accountant and lawyer and see what kind of strategy will work best for you--and whether insurance has a place in it.

Ballentine: Besides life insurance and disability coverage, estate protection is an especially important issue at this stage because your assets are still largely illiquid. Remember, you can give yourself a double home run if you set up an irrevocable life-insurance trust to be the owner of the coverage on your life. As long as you comply with all the rules (which include making certain that you, as the insured person, have no control over or benefit from the trust), all insurance proceeds will be free of estate and personal-income taxes.

STAGE 4: You're 65 and the kids are all grown up. Can you finally stop worrying about insurance?

Daily: Let's say you still own your company and have built up hefty savings. Although your spouse might not need the proceeds from an insurance policy to replace your lost income, you still might want to purchase insurance to cover estate taxes. Meanwhile, if your spouse plans to sell the company's stock in the event of your death, then insurance would definitely be useful to fund the carrying out of a buy-sell agreement.

Ballentine: If you've taken your company public or sold it, there's likely no need to replace your salary or help your spouse fulfill outstanding financial obligations. But even if you've got a large savings-and-investment portfolio, you probably wouldn't want your family to have to liquidate it to pay estate taxes. Here again, having insurance owned by a trust can be very effective.

Whatever stage your company is in, you should reexamine your insurance coverage every three years or anytime there's a major change in your family or business situation.

Jill Andresky Fraser is Inc.' s finance editor.

Resources: It pays to check out the financial condition of insurance companies, especially when you're considering purchasing a term life or disability policy that promises to lock in attractive rates over a long period of time. The best way to do that is by contacting the Weiss Group of Cos., a comprehensive rating service that provides consumers with low-cost information about major insurers. For more information, call Weiss at 800-289-9222.

ROY BALLENTINE, Ballentine & Co., 16 Depot St., Wolfeboro, NH 03894; 603-569-1717

GLENN DAILY, 234 E. 84th St., New York, NY 10028-2902; 212-249-9882