- How much life insurance do I need?
- How much does life insurance cost?
- What type of policy should I buy, term or permanent?
- What are the various kinds of permanent insurance?
- What are accelerated death benefits and how do they work?
- By using medical tests are insurers trying to eliminate any applicant likely to develop a serious health condition?
- What should I consider in naming life insurance beneficiaries?
- Does it make sense to replace a policy?
- What happens if I fail to make the required premium payments?
- Should I just buy basic life insurance coverage or is it worth considering the “bells and whistles” that some policies offer?
This is almost always the first question people ask me, and it’s probably the most important question to ask.
As a very general rule of thumb, you should have at least 10X your annual salary in life insurance coverage. So if you make $100,000 a year you should have at least $1,000,000 of life insurance coverage.
That all being said, it’s usually not that easy to calculate your needed coverage.
Determining how much life insurance you truly need requires a careful examination of your current and future financial obligations. Some major factors that need to be considered and discussed before purchasing life insurance are:
- Your Age
- Marital Status
- Health Issues
- Cost to Pay Off Mortgage
- Cost to Pay Off Major Outstanding Debts
- Educational Funds for Children
- How Many Children You Have
- Total Family Income
- Existing Assets
- Amount of Income Needed for Spouse/Loved Ones
This is the second most asked question I always hear about life insurance.
Unfortunately, the best answer I can provide is, “it depends.”
I do also have to say be careful when getting quotes from companies. Many times companies provide the very best rates that only highly qualified people will receive.
Factors that determine the cost of your life insurance:
- Amount of coverage
- Type of coverage
- Your Age & Gender
- Your medical history
- Your families medical history
- Your build (ie. height & weight)
- Your current health status (determined by a quick medical exam)
- …and several other factors.
It’s impossible to say which is better because the kind of coverage that’s right for you depends on your unique circumstances and financial goals.
That being said, here’s a quick description of the two major types of policies.
Term life insurance provides coverage for a fixed period of time. For example: $1,000,000 for 30 years. Most term policies also offer a fixed rate during the term, so you will always pay the same amount throughout the term.
Term insurance is typically the least expensive and simplest type of coverage, but does not provide savings.
Permanent life insurance provides coverage for an indefinite period of time, and can usually provide guaranteed coverage for the rest of your life.
There are many types of permanent coverage (see below), and before considering which option may be the best for you, it is wise to investigate all the options available.
Unfortunately, the unscrupulous sales practices of some insurance agents has caused some debate on the validity of permanent life insurance. For this reason, I would highly recommend that anyone seeking permanent insurance educate themselves and seek out an advisor in whom they trust.
There are four main types of permanent life insurance.
Whole life insurance is the most traditional form of “permanent” insurance, and has been around the longest.
Whole life insurance premiums remain at a fixed level for the duration of the policy. With it, the face amount (the death benefit) and the premium (the amount you pay for protection each year) are fixed at the time you buy your policy and stay the same even as you age. You also get a guaranteed rate of return on your cash values that generally grows on a tax-deferred basis.
Universal life insurance – of which there are several types – entered the life insurance market in the early 1980s as a more flexible version of Whole Life Insurance. Universal life insurance is a permanent policy that allows you the flexibility to customize the coverage and premiums that meet your needs – within limits of course. As with Whole Life policies, Universal Life insurance provides a savings vehicle (cash value account) which generally earns a guaranteed rate of interest. The cash value belongs to you, the policy owner, and you may withdraw or borrow against it as provided for in the policy.
Variable Life insurance is a kind of policy that, in addition to a death benefit, offers several professionally managed investment options. You can use the cash accumulated in your savings account to invest in stocks, bonds and money market mutual funds. The value of your policy may grow more quickly, but you also have more risk. If your investments do not perform well, your cash value and death benefit could decrease, or you could be required to pay higher premiums to keep the policy in effect. Some policies, however, guarantee that your death benefit will not fall below a minimum level. As with whole life insurance and universal life insurance policies, you also may borrow against or withdraw the cash value at any time. However, it is important to remember that loans and withdrawals could reduce cash values and the death benefit.
Variable-Universal Life insurance policies combine the features of variable and universal life policies. You have the investment risks and rewards characteristic of variable life insurance, coupled with the ability to adjust your premiums and death benefit that is characteristic of universal life insurance.
Many policies contain a provision that allows a terminally ill person to collect a significant portion of his or her policy’s death benefit while that person is still alive. The money can be used to get one’s family finances in order, pay for uncovered medical expenses, or simply do certain things for your family or friends while you still can. It’s important to note that the amount you take out while still living will be subtracted from the death benefit payments to your beneficiaries along with an interest charge to account for early payment of benefits.
By using medical tests are insurers trying to eliminate any applicant likely to develop a serious health condition?
Medical tests provide accurate and current information about an applicant’s health, thus enabling insurers to charge premiums that reflect the level of risk an applicant represents. Because some health conditions are easily managed through proper medication, therapy or lifestyle changes, medical information makes it possible for insurers to cover applicants with certain health conditions. More serious or incurable conditions present a very significant risk that some insurers simply may not want to assume.
What should I consider in naming life insurance beneficiaries?
- Always consider naming a “contingent,” or secondary, beneficiary, just in case you outlive your first beneficiary.
- Select a specific beneficiary, rather than having the proceeds of your life insurance paid to your estate. One of the great advantages of life insurance is that it can be paid to your family immediately. If it is payable to your estate, however, it may have to go through probate with the rest of your assets. Which is why it may also be wise to learn about the benefits of a Living Trust.
- Be very specific in wording beneficiary designations. Saying “wife of the insured” could result in an ex-spouse getting the proceeds. Naming specific children may exclude those born later. If your child dies before you, do you want the proceeds to go to that child’s children? Changing the beneficiary designation is easy, but you have to remember to do it. Due to the various issues involved, an agent can be an excellent source of information to help you properly set up your beneficiary designation.
Think twice before you do, because in many situations it may not be to your advantage. Before dropping any in-force policy, consider:
- If your health status has changed over the years, you may no longer be insurable at standard rates.
- Your present policy may have a lower premium rate than is required on a new policy of the same type (if, for no other reason, that you have grown older).
- If you replace one cash-value policy with another, the cash value of the new policy may be relatively small for several years and may never be as large as that of the original one.
- You will be subject to a new contestability period.
What happens if I fail to make the required premium payments?
If you miss a premium payment, you typically have a 30- or 31-day grace period during which you can pay the premium with no interest charged. If you own a term policy and fail to pay your premium within the grace period, your insurance company will typically terminate the policy. If you own a permanent policy and fail to pay your premium within the grace period, your insurance company, with your authorization, can draw from your policy’s cash value to keep the policy in force. In some flexible-premium policies, premiums may be reduced or skipped as long as sufficient cash values remain in the policy. However, this will result in lower cash values and a shortened coverage period.
Should I just buy basic life insurance coverage or is it worth considering the “bells and whistles” that some policies offer?
Whether you should consider adding a rider to a policy you’re considering really depends on your specific needs, objectives and budget. Here are a few riders that you at least should take a close look at and consider. A disability waiver of premium rider stipulates that if you become totally disabled for a specified period of time, you don’t have to pay premiums for the duration of the disability. Why might you want to consider such a provision? Disabling illnesses and injuries are much more common than you probably realize. If you become disabled and your income declines or disappears for a period of time, a disability waiver of premium can ensure that your life insurance policy will remain in force. An accidental death benefit is another common rider. It will pay an additional benefit in the case of a death resulting from an accident. Many companies offer accelerated death benefits, also known as living benefits. This type of rider allows you, under certain circumstances, to receive the proceeds of your life insurance policy before you die. Such circumstances include terminal or catastrophic illness, the need for long-term care, or confinement to a nursing home. Ask your agent for information about these and other policy riders.