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How Much Life Insurance Coverage Do I Need?

The amount of coverage you select should be equal to the financial loss which the death of the insured will impose upon you (or your beneficiary) and many Industry experts recommend that you purchase 8 to 12 times your current annual income.

However, this rule of thumb does not account for current assets or any special needs you and your family may have. Additionally, your age and income have a direct bearing on your life insurance needs. Generally, the younger you are, the more insurance you need to replace a loss of lifetime income for your beneficiary.

We recommend you consider these important factors in estimating your family’s financial needs in the event of your death.

• The amount of yearly income needed
• The number of years this income will be needed
• The average annual percentage of interest your investments will earn
• Future college education expenses
• Anticipated funeral and burial expenses
• Retirement needs
• Special needs for children or other family member(s)

Types of life insurance

Life insurance can be divided into three basic categories: term life insurance, whole life insurance, and universal life insurance.

Term Life Insurance – Provides coverage for a fixed duration of time (e.g. 20 years). The policy only pays a death benefit if the insured individual dies before the policy expires.

Whole Life Insurance – These policies guarantee coverage up to a certain age (usually age 95 or 100) and provide cash value, which means that they can be liquidated for cash in the event the insurance is no longer needed.

Universal Life Insurance – These policies can be maintained indefinitely and are often referred to or defined as “Lifetime” coverage. These policies carry minimal cash value and allow for flexible payments of any amount at any time (up to certain government-stipulated maximums).

Choosing the right life insurance policy

Two questions present difficulty for most life insurance buyers:

1. How big of a death benefit do I need?
2. How long do I need coverage?

The simplest answers to these questions can be provided by determining “How much income or revenue your family or business would need on an annual basis to maintain their current financial well-being?” and “How long your family or business needs the protection?”

In general:

1. Most people need a death benefit at least 8 to 12 times their annual income.
2. Wage-earners need coverage for at least as long as they expect to be gainfully employed.
3. Homemakers need coverage for at least as long as their dependents (children, invalids, etc.), who need care, will be in the home.

How life insurance works

There are four parts to a life insurance contract: the life insurance company, the policy owner, the individual(s) being insured (often the same as the owner), and the beneficiary – often a family member, business or business partner, or other legal entity like a trust.

The life insurance company agrees to ‘insure’ or pay a death benefit to the policy’s beneficiary assuming the policy is ‘in force’ or active at the time of the insured’s death. The policy owner is responsible for paying premiums in order to maintain the policy in force.

The purposes of life insurance

The most common purpose of life insurance is to protect the finances of one’s family or friends in case of a wage-earner’s death, but that’s not its only use. Life insurance can be used:

• To hire childcare to replace a home-maker’s contribution
• For estate protection
• For mortgage protection
• To fund a retirement
• To protect a business against the loss of a key employee
• As an employment benefit

The process of buying life insurance

Buying life insurance typically takes 4-6 weeks. Why? Because each insurance company has a process they use to determine if, and at what health rating they are willing to offer coverage to an applicant. Here are the steps a life insurance buyer typically undertakes to obtain life insurance:

1. Compare life insurance quotes from various insurers. Your rates are only estimates based on your age, sex, and basic medical information.
2. Complete an application. The application is completed via a phone interview process that will be gathering any additional information needed. The completed application is then sent to you for review and signature.
3. Undergo a medical exam. The insurance company collects data about your personal health by sending a medical examiner to your home or office, free of charge.
4. Wait for underwriting. For most applications, the insurer requires several weeks to collect and evaluate data from your physician and perhaps other sources of information.
5. Accept an offer. If the insurer is willing to accept your application, they will send you an offer. To put your contract in force, sign the offer and return it with your first premium payment. Until you do so, there is never an obligation to buy.

Is A Medical Exam Required?

Most life insurance companies require a medical exam as part of the life insurance application process. The medical exam can be completed at your home or any other convenient location of your choice and typically 15-30 minutes to complete. Exams are conducted by a licensed paramedical or medical doctor and generally require a blood and urine specimen, blood pressure readings, height and weight measurement, and a series of questions regarding your medical history.

What is Mortgage Protection Insurance?

Mortgage protection insurance, also known as mortgage life insurance, is a type of life insurance designed to pay-off your mortgage and provide financial protection in the event of your death.

Is it the Same As Private Mortgage Insurance (PMI)?

No, Private Mortgage Insurance or PMI is used to protect your lender should you default on payments. With a mortgage protection insurance policy, the death benefit is used to pay off the remaining balance on your mortgage. Mortgage protection insurance instead protects your family and loved ones and allows them to keep your home in the event of your untimely death.

How long does Mortgage Protection Insurance Last?

Normally, mortgage protection insurance is purchased for a 30-year duration to match a typical mortgage term. However, depending on the time remaining in the mortgage and other needs, the term of the policy can be more or less than the term of the mortgage.

Who Should Purchase Mortgage Protection Insurance?

Mortgage protection insurance can be purchased with the sole purpose of paying off your mortgage, but many financial planners would suggest that you look at your financial situation as a whole and buy a life insurance policy that takes all of your finances into account.

Income Replacement through Life Insurance

Without a doubt, the most common use of life insurance is to provide for our loved ones. Most often this translates to income replacement based on the life of the insured.

Common Uses of Income Replacement Insurance

Most life insurance shoppers want to provide for these common concerns:

• Standard of living. Life insurance can provide for the daily necessities of your loved ones and allow them to maintain their standard of living without the discomfort of adapting to a new home, school or limited financial means.
• Child care. Every parent, wage-earner or not, would do well to have life insurance coverage. An adequate death benefit enables the surviving parent to either stay home with the children or hire a caregiver.
• Higher education. Many want to provide for their children’s college expenses or send their spouse back to school in the event of their untimely death.

Term life insurance is usually recommended for these needs because of the lower cost associated with it; although other options may fit your individual needs better.

Estate Protection with Life Insurance

Many of us own houses; some of us own businesses; a few own other sizeable assets. In most cases, we want our heirs to receive these assets intact and in entirety. Life insurance is one of the best tools available to accomplish estate protection. Normally, permanent life insurance is used in estate planning situations.

The Estate Tax Problem

Federal taxes alone can exceed 50% of an estates value. When an estate does not include enough liquid assets to pay the taxes due, assets must be sold. Thus, businesses, houses, etc. are removed from the estate, and the inheritance available to the heirs is considerably less than the estate’s actual worth.

How life insurance protects an estate

The obvious role that life insurance plays in estate protection is to provide enough funds to cover the estate taxes. But there’s more… one of the reasons that life insurance is so appealing is that proceeds from life insurance are generally exempt from taxes.

What is Buy / Sell Insurance?

Buy-sell insurance is one of the best ways to assure the continuation of your business in the event of a partner’s death. Many businesses purchase buy-sell life insurance to avoid the pitfalls often involved in the continuation of a business following the death of a partner.

Is a Formal Buy / Sell Agreement Required?

Buy-sell insurance is often accompanied by a legal buy-sell agreement that requires any surviving partner(s) to purchase the remainder of the business in the event of a partner’s death-but is not a requirement. In the event of a death, the purchase is funded by the death benefit proceeds provided by the buy-sell insurance policy.

How much insurance is allowed under a Buy / Sell Agreement?

The amount of insurance necessary varies by company and is often determined by taking the market value of the business divided by the percentage of ownership of the insured partner. Generally, up to 5 times the annual revenues generated by the business can also be included.

What is Key Person Insurance?

Often referred to as Key man insurance, it is a life insurance policy, held by a business, to cover the life of a vital employee. The proceeds from a key man life insurance policy are intended to provide the business with the time and money it needs to stay afloat while replacing a lost key employee.

Who buys key person life insurance?

Any business which employs individuals who are vital to the company’s survival (key employees) is a candidate for key man insurance. Many companies cannot survive the death of a key man or woman because the knowledge, skills, contacts, or business relationships of the deceased are so difficult to replace.

It is most frequent for small-to-medium-sized businesses to find themselves in need of key man insurance, but even large companies use it to protect themselves from the expense of finding and training a replacement for a key employee.

Who qualifies as a key person?

The qualifications of a key man or woman depend on your company (and your discretion). A general description is: an employee who possesses skills, knowledge, contacts, and/or relationships which are crucial toward your company’s continuance but which are very costly or difficult to replace.

Types of key person insurance

A business is eligible to buy any type of life insurance that a family or individual can purchase. Which type is best? Term life insurance is appealing because the key man or woman’s employment is expected to end by retirement age (term life insurance is the most affordable). However, cash value life insurance can also be appealing because it can be liquidated in the event that the key man or woman leaves employment without dying.