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:
- Allow you to participate in the needs analysis process
- Effectively determine how much life insurance coverage is necessary given your family’s income needs
- Help correlate the amount needed to maintain a standard of living to the amount of income the coverage will provide
- Pinpoint the most appropriate death benefit increment
| 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, 20 years, 30 years, and even 40 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.
Email or call us anytime to discuss your life insurance needs.