Dorn Agency, Inc.
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Life Insurance 101

A person needs life insurance if an economic loss would occur in the event of his or her death. The death benefit would be paid to reimburse the beneficiaries for their economic loss. This beneficiary could be a spouse, a child, a business, a business partner, a trust, a charity, a friend, a creditor, or combinations of any of these. There are obviously many uses for life insurance. The good news is that rates are declining as people tend to live longer.

Most financial planners today recommend term life insurance as opposed to various forms of permanent life. But like other things in life, this is not a matter of whether one is right and the other is wrong. It all depends on what the objectives are for the life insurance. Your own individual time horizons as well as your budget will help determine what is best for you.

How Much Life Insurance Do I Need?

The most common question we are asked is "How much life insurance do I need?" The chart below is designed to:

Amount of Life Insurance Protection Required to Replace Specified Income Amount
Based on Lump Sum Growing at 3.25%, Net of Annual Income Distribution at Beginning of Year
Equivalent Monthly Income to Replace Equivalent Annual Income to Replace 10 Years of Income to Replace 15 Years of Income to Replace 20 Years of Income to Replace 25 Years of Income to Replace 30 Years of Income to Replace
$2,500 $30,000 256,528 356,750 441,959 514,403 575,996
$3,750 $45,000 384,793 535,125 662,938 771,605 863,994
$4,000 $48,000 410,445 570,800 707,134 823,045 921,594
$5,000 $60,000 513,057 713,500 883,917 1,028,807 1,151,992
$6,250 $75,000 641,321 891,875 1,104,897 1,286,008 1,439,990
$8,333 $100,000 855,061 1,181,119 1,473,137 1,714,609 1,919,910
$10,416 $125,000 1,068,800 1,486,363 1,841,377 2,143,210 2,399,830
$12,500 $150,000 1,282,642 1,783,750 2,209,793 2,572,017 2,879,980
$14,583 $175,000 1,496,382 2,080,994 2,578,033 3,000,617 3,359,900
$16,666 $200,000 1,710,121 2,378,238 2,946,273 3,429,218 3,829,819

Term Life

Term Life is pure and simple. It provides a death benefit, and only a death benefit. The premiums are typically guaranteed for a specific “term”, hence the name. The guaranteed term periods are typically 10 years, 15 years, 20 years, and even 30 years. In other words, you can lock up a rate for the term period you need.

Shopping for the “best” rate is important, but getting a rate over the phone or on a website is often misleading. There are many factors that go into finding the “best” rate for you. Various underwriting considerations, such as medical history, tobacco use, height and weight, family history, financial history, etc. may determine which company to use and the premium being charged. In this age of heightened terrorism, foreign travel is a major concern of insurance companies and rates can vary widely or not be available at all for certain destinations.

Permanent Life

Permanent insurance is used in those situations where someone needs or wants coverage for longer periods of time than term insurance will provide. It has many variations, with names such as Universal Life and Whole Life. Although significantly more expensive than term in the short run, in the long run they may provide better value. As people are living longer, and more of us make it to age 100 and beyond, sometimes the need for life insurance is extended, and term insurance will not work in those situations.

As a consequence of these higher premiums for permanent life insurance, a cash value accrues to the owner of the policy over time. These values can be used by the owner of the policy to provide education or retirement funds in the future. Recently in Arizona , a law was put into effect giving permanent life insurance values more protection against creditors than previously allowed. This has made permanent life insurance more attractive than it was, especially to physicians and others who are overburdened with litigation worries.

Group Life

Businesses use group life as an inexpensive, but very valued employee benefit. Typically insurance is issued without any medical questions, and premiums for amounts up to $ 50,000 of death benefit are not included in income to the employee.

E-mail me or call 480-614-2507 to discuss your personal situation and needs for life insurance protection.

Section 79 Life Insurance

This is the section of the Internal Revenue Code governing Group Life Insurance. For those business owners and professionals with a C-corporation (regular corporation) it may allow the deductibility of permanent life insurance premiums with significant tax advantages.