Mellody's Math: Over- or Under-Insured?

NEW YORK, March 21, 2002 — -- Like many Americans, you may be giving serious thought to your insurance needs following Sept. 11.

About 1.4 million life insurance applications were filed in October — up 9 percent from the same period in 2000.

As people's interest in insurance grows, so should their knowledge of what is appropriate coverage. Although it all depends on where you are in your life and what your responsibilities are, there are certain universal ground rules that you should consider before you purchase insurance.

Life Insurance — To Insure or Not: Most experts recommend that a person carry insurance coverage of five to 10 times their annual gross salary. The primary reason to own insurance is to ensure that when you die your debts will be covered and your dependents will have the financial resources need to run the household without you. So if you are single, without dependents, and have little outstanding debt, consider taking a pass on life insurance.

Term vs. Permanent — Which One Is Right for You?: Those with dependents face a choice between term and permanent insurance. Think of term and permanent insurance as you would the difference between renting and buying a home.

With term insurance, similar to a renter, you pay for something that ultimately is not your own. Likewise, permanent insurance is similar to taking on a mortgage of a home, which will ultimately be yours. After you complete the final premium prepayment, the permanent policy, with its "cash value," is yours.

Term insurance can be seen as a cushion for what you have not been able to accumulate. For those with expenses like tuition or a mortgage, term insurance is the way to go. However, for expenses that extend beyond the immediate, permanent insurance is a means to provide additional financial security for your dependents.

Health Insurance: The main precursor to sound financial health is good physical health. According to the National Foundation for Credit Counseling, medical bills are the fourth biggest reason people go into serious debt. And with an estimated 42 million Americans without health insurance, this is a cause for serious concern.