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Can you ditch your life insurance?

In hard times, more people are canceling their life insurance coverage. Here are some cheaper alternatives.

By G. Jeffrey MacDonald/ Correspondent / February 17, 2011

When she was married, Ruby Campbell did not have life insurance, but now that she is the sole provider the Nampa, Idaho, mother of two, Amanda and Cody, she has life insurance. Hard times tempt people to ditch their coverage. But there are other ways to keep costs low while limiting your risk.

Darin Oswald/Idaho Statesman/MCT/Newscom/File

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It's enough to make an insurance agent tremble: Millions of cash-strapped Americans are saving money by going without life insurance.

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Ownership of life insurance has reached a 50-year low, according to industry research firm LIMRA. Thirty percent of households (35 million) aren't covered, up from 22 percent in 2004. Among households with minor-aged children, 11 million have no coverage.

Insurance salespeople have sounded the alarm, warning that penny-wise and pound-foolish habits could leave loved ones devastated if a death occurs. Financial advisers agree that many Americans probably should have at least a little life insurance. But experts also urge people who are pressed for cash to keep in mind the ultimate goal: limiting risk for survivors. Life insurance isn't the only way to accomplish that goal.

"Say you didn't have any kids, your spouse has a law degree, and you don't owe a lot of money in your business. You may not need to get life insurance," says Bill Gustafson, senior director of the Center for Financial Responsibility at Texas Tech University in Lubbock. "Because she's got human capital, she'd be able to enter the labor force if something happens to the other person."

So what are other ways to limit risk for the survivors? Start with estate planning, financial advisers say. People with dependents should use such instruments as wills and trusts to direct assets in a tax-efficient manner to survivors, according to Stuart Armstrong, a certified financial planner in Needham Heights, Mass. Those who take such steps might still need some life insurance, he says, but they may not need as much – or may not need any if assets are substantial enough.

Even those with few or no assets can benefit from estate-planning principles, planners say. For example: Inexpensive wills can provide for guardianship of a child or a dependent elder. If a head of household makes arrangements with trusted family members to provide for dependents, then that person has substantially cut his or her survivors' risks, according to Tom Fisher, a certified financial planner in Cambridge, Mass. This approach might function as a type of de facto insurance policy, he says, in families that cannot afford life insurance – or who choose not to carry it.

Get a verbal agreement, at least

"I would certainly encourage them to make sure they've had that conversation [about providing for dependents], rather than just assuming it," Mr. Fisher says. "It's not so much a matter of getting it in writing, if you trust your family, but you do want to make provisions [for] guardianship."

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