Do you need life insurance? If someone would suffer financially at your death, you probably need life insurance.
- 44% of all households (48 million) either don’t own life insurance and believe they should or own life insurance and believe they need more.*
- Consumers feel buying life insurance is an important and complex financial decision. Half of them find it difficult to decide how much to buy.*
- About 75% of American households have no personal life insurance agent or financial advisor.*
(*LIMRA International, Facts About Life, 2006)
Make TODAY the day that you take this very important step in protecting your loved ones.
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How much life insurance do I need?
A basic rule of thumb is to buy life insurance equal to 10 to 20 times your annual income, but your needs will vary greatly according to your financial assets and liabilities, income potential and level of expenses and debt.
When you buy life insurance, you want coverage that fits your needs and doesn’t cost too much. First, decide:
- How much you need and
- For how long, and
- What you can afford to pay
To help you decide how much and what type of life insurance you need, you’ll need to evaluate your family’s financial needs; see below for a helpful form.
Organize your family’s financial information and estimate what your family would have if you were to die now. Next, identify your primary reasons for wanting/needing to purchase a life insurance policy.
Some primary reasons for coverage may include:
- Burial expenses
- Income continuations for a spouse or family members
- College funding for surviving children
- Retirement funds for surviving spouse
- Asset protection
- Debt coverage (medical bills)
- Business planning
- Estate taxes and estate planning
Simply put, there are two variables when calculating your total need:
- How much will be needed at death to meet obligations
- How much future income is needed to sustain the household
When calculating your expenses, it is best to overestimate your needs a little. Yes, you’ll be buying and paying for a little more insurance than you need, but if you underestimate, you won’t realize it until it’s too late to make the appropriate changes.
| If you purchased this amount of life insurance… | $100,000 | $250,000 | $500,000 | $1,000,000 |
| And your family spent $25,000 for last expenses | $75,000 | $225,000 | $475,000 | $975,000 |
| Your family will have this monthly income for 10 years | $788 | $2,365 | $4,992 | $10,247 |
| This monthly income left for 20 years | $488 | $1,465 | $3,093 | $6,349 |
| This monthly income left for 30 years | $396 | $1,118 | $2,508 | $5,147 |
Types of Life Insurance
Personal Life Insurance
Term Life
Term insurance covers you for a term of one or more years. It pays a death benefit only if you die in that term. Term insurance generally provides the largest immediate death protection for your premium dollar.
Whole Life
Whole Life insurance covers you for as long as you live. The common type is called straight life or ordinary life insurance – you pay the same premiums for as long as you live. These premiums can be several times higher than you would pay at first for the same amount of term insurance. But they are smaller than the premiums you would eventually pay if you were to keep renewing a term policy until your later years.
Some whole life policies let you pay premiums for a shorter period such as 20 years or until age 65. Premiums for these policies are higher than for ordinary life insurance since the premium payments are squeezed into a shorter period.
Whole life policies develop cash values. If you stop paying premiums, you can take the cash – or you can use the cash value to buy continuing insurance protection for a limited time or a reduced amount. (Some term policies that provide coverage for a long period also have cash values.)
You may also borrow against the cash values by taking a policy loan. Any loan and interest on the loan that you do not pay back will be deducted from the benefits if you die, or from the cash value if you stop paying premiums.
First-to-Die Life Insurance
A joint life insurance policy that covers two or more insured’s with one policy, with benefits being paid to a beneficiary upon the first-to-die. It may be a term or whole life policy. If one of the insured’s die, the joint policies allow the surviving insured to purchase permanent coverage without evidence of insurability (no medical exams needed or additional requests for Doctor’s notes).
Second-to-die (Survivorship) Life Insurance
Second-to-die (Survivorship) life insurance is a form of whole life insurance that covers two lives and pays the proceeds at the death of the second insured. This type of policy is used primarily for estate planning
Universal Life
Universal Life insurance is a flexible premium, adjustable death benefit policy that accumulates cash value. The Account Value earns interest that is credited monthly. The interest rate is subject to change, but typically has a guarantee of 3.5%-5% per year. Universal life insurance was created to provide more flexibility than whole life insurance by allowing the policy owner to shift money between the insurance and savings components of the policy. Premiums, which are variable, are broken down by the insurance company into insurance and savings, allowing the policy owner to make changes based on their individual circumstances. For example, if the savings segment is earning a low return, it can be used instead of monthly/quarterly payments to pay the premiums. The flexibility of this policy allows you to change the amount of insurance as your needs for insurance change. Some changes require underwriting approval.
Death Benefit Options
There are two death benefit options you can choose with a Universal Life Insurance policy.
Provides a level death benefit equal to the Basic Amount of life insurance you choose.
Provides a death benefit that varies with your policy Account Value. Your death benefit is the amount of life insurance plus the policy Account Value
As with all life insurance, the main purpose for buying a Universal Life insurance policy is the death protection provided to your loved ones at your death and should not be seen as an investment vehicle.
Business Life Insurance
Key Person Insurance
A key person insurance plan can provide a benefit to the business by insuring the value of the key person, or persons, as a human asset. The business must protect against the negative economic impact that the loss of such a person can have on the continued operations, customer relationships and credit worthiness of the business. The proceeds are paid to the business to offset a drop in profits and help pay to recruit and train a suitable replacement. The business is the applicant, the owner, the beneficiary and pays the premiums.
Buy/Sell Insurance
A Buy-Sell agreement determines how ownership of a business will be transferred if one owner dies. This insurance assures that the money will be available to pay off the deceased partner’s family and the business will be owned solely by the surviving partner(s). Each partner owns, is the beneficiary of, and pays for the premiums for life insurance on the other partner(s) in an amount approximately equal to his share of the business.
To find out more about how these programs can help meet your business’ needs, contact me.
Insurer’s Ratings
Whether you decide on Term, Whole, or Universal life insurance, the financial soundness of a company is important. It is best to select a company with an insurer rated A or better; the most financially secure insurers are rated AAA (or A+++) and have a good history of paying claims. Here are some websites that can help you feel confident about the company you select:
Standardandpoors.com
Fitchratings.com