How Much Insurance is Enough?
Life insurance is a crucial step in planning for your future. Not only can life insurance fulfill promises made to your family if you are no longer around, but there are also several life insurance policies that provide benefits while you are living.
Determining Your Need
The need for life insurance is dependent on your own personal and financial needs. We can assist you in determining what type and amount of life insurance is appropriate for you. Generally, you should consider life insurance if:
- You have a spouse
- You have dependent children
- You have an aging parent or a physically challenged relative who depends on you for support
- Your retirement savings are not enough to insure your spouse’s future against a rising cost of living
- You have a sizable estate
- You own a business
There are benefits of life insurance other than providing for your loved ones in case something happens to you:
The cash value earned and borrowed from a permanent life insurance policy can be used to help with large expenses, such as a college education or down payment on a home.
The growth of a cash-value policy is tax-deferred — you do not pay taxes on the cash value accumulation until you withdraw funds from the policy.
Life insurance can be used to cover funeral expenses and pay estate taxes — consult your tax advisor agent for more information.
Life Changes – So Should Your Policy
Your need for life insurance is dependent on your personal and financial needs. As your life changes, your life insurance coverage may need to change as well to adapt to your current needs. Some life changes that may require a policy “tune-up” include:
- You recently married or divorced
- You have a new child or grandchild
- Your health or your spouse’s health has deteriorated
- You are providing care or financial assistance to a parent
- Your child or grandchild requires assistance or long-term care
- You recently purchased a new home
- You are planning for a child or grandchild’s education
- You are concerned about retirement income
- You have refinanced your home mortgage in the past six months
- You or your spouse recently received an inheritance
What if I already have life insurance coverage through my employer?
That’s great, and it’s wonderful that you are fortunate enough to have an employer that recognizes the value of life insurance coverage for you and your family. Be sure to find out from your employer if this coverage is ‘portable’, meaning you can take your policy with you when you leave the company or become disabled. Not all policies are portable. When talking to your insurance professional, be sure that he or she knows you have this type of coverage so that can be factored into any determination of your additional needs.
How much life insurance should I purchase?
As a “rule of thumb,” you should purchase an amount of life insurance equal to 6 to 8 times the annual earnings. However, many factors should be taken into account in determining a more precise estimate of the amount of life insurance needed. Important Factors include:
- Income sources (and amounts) other than salary/earnings
- Whether or not the individual is married and if so, the spouse’s earning capacity
- The number of individuals who are financially dependent on the insured
- The amount of death benefits payable from Social Security and from an employer-sponsored life insurance plan
- Whether any special life insurance needs exist (e.g. mortgage repayment, education fund, estate planning need) etc.
It is recommended that a person’s financial professional be contacted for a precise calculation of how much life insurance is needed.
How do I know which is the right type of life insurance?
The answer will vary depending on your circumstances, need for the coverage, timing of the purchase and how much you are willing or able to spend. The best way to determine the right policy is to sit down with a qualified insurance professional to review the key points of your particular situation. This can be done in a very short (30 minutes or less) interview to determine your needs.
Why should I purchase life insurance coverage for my children or my spouse?
Your priority is to provide for your family. This should be your priority when considering life insurance as well.
You must have the means to take care of your financial obligations, as well as providing care for your children should your homemaker-spouse die. The opportune time to buy life insurance for your children is when they are young and the rates are low. This enables them to continue the coverage when they are grown with financial obligations of their own. This also protects their “insurability”, should they develop any sort of health problem later in life. There are many types of policies that can be made into “family plans” at a lower cost than separate coverages for each individual. Talk to your insurance professional to determine your needs.
My mortgage company says I should buy life insurance from them, what is that about?
Most likely your mortgage company is offering something called “mortgage protection life insurance” or “decreasing mortgage protection” or a similar title. This sort of protection is a basic term life insurance policy that usually has a level premium, but the death benefit pays off your mortgage loan at your death. This level premium may or may not reflect the decreasing death benefit. What that means is that you will be paying the same premium each year for a death benefit that is decreasing over time (as your mortgage decreases with payments). This is the case with any sort of “credit life insurance”, insurance taken out in conjunction with an installment loan. There may be better alternatives. You should talk to your insurance professional before purchasing any type of coverage to see what other alternatives are available.
Life Happens, formerly the LIFE Foundation is a non-profit organization designed to address the public’s growing need for information and education on life, health, and disability insurance. LIFE also seeks to remind people of the important roles agents perform in helping families, businesses, and individuals find the insurance products that best fit their needs.