Why do I need life insurance?
Life insurance is a way to provide cash to your family when you die. The money your beneficiaries receive can be used to cover fi nal expenses, pay off debt and cover the mortgage or rent. It can provide a college fund, provide retirement money, create cash to payestate taxes or simply provide a stream of income that will help your family maintain its present lifestyle. The death benefi t paid is generally income tax free. Business owners use insurance to help transfer the business to the next owner.
How much do I need?
There are several ways to determine your personal insurance need. Here are three common methods:
Rule of Thumb
— The amount you need is five to seven times your annual gross income.
Expense Calculation
— Determine expenses for burial, an emergency fund, personal debts, mortgage, college education fund and any income replacement; add these together to determine your nsurance need.
Income Replacement
— Determine how much of your annual income your family would require to maintain its current st andard of living (average is 70%); purchase enough insurance so the proceeds, if invested at an after-tax rate of 8%, would generate this income. For example, if your income is $40,000, then your coverage should generate $28,000 of annual income ($40,000 times 70%). $28,000/8% = $350,000 of life insurance coverage.
Please see your legal or tax advisor for answers to your specifi c tax questions.
What is term life insurance?
Term life insurance provides protection over a specifi c period of time. It pays a benefit only if the insured dies during this specifi c period or “term.” Terms can vary from policy to policy, but can range from a one-year term to a 30-year term. At the end of each term, the insurer may require you to provide evidence of good health to purchase continued protection. Annual renewable term may continue without further qualifi cation, but premiums may increase each year.
How is permanent life or cash valuelife insurance different?
Permanent life insurance provides lifelong protection. As long as you pay the premiums, the death benefi t remains in eff ect. And, most permanent life insurance builds a cash value —term policies don’t. Permanent life insurance policies are designed and priced to be kept for long periods of time. Individuals who seek long-term protection should consider permanent insurance instead.
Are there diff erent kinds of term life insurance?
There are many diff erent varieties of term life insurance. Because term life insurance is designed to provide the maximum amount of protection for the least amount of premium, insurance companies can offer modified plans to fit your circumstances.
Annual Renewable Term
— The death benefit is a level amount. The policy is automatically renewed the next year without evidence of insurability. However, the premiums may increase each year with age.
Level Term
— The death benefit is a level amount.
The policy is generally purchased for a period of 10, 20 or 30 years, and the premium will often remain level over the entire period. Premiums will generally be higher than the initial premium for an annual renewable term of the same face amount. But, the premium will remain the same in later years when the annual renewable term premium is still increasing.
Decreasing Term
— Typically used to help pay the mortgage, decreasing term maintains a level premium over a specific number of years and the benefi t decreases every year until the selected term period expires. For example, you may purchase a $100,000, 30-year policy to help provide funds that may be used to pay the mortgage in the event of your death. The life insurance benefit will decrease with your mortgage over time. After 30 years, your coverage will end.
Credit Insurance
— You may receive offers in the mail for mortgage insurance or credit insurance. They are really offering you a type of term insurance — and at a hefty price. If your health is good, you may be able to purchase an individual term policy to provide this coverage at a fraction of the cost.
What are the conversion privileges?
Many insurance companies offer a conversion privilege. This means you may convert or exchange your term policy for a permanent, cash-value policy equal to the current death benefit amount of the term coverage. Usually, there are no further medical questions. Keep in mind the longer you wait to convert, the higher the premiums will be on your new permanent policy. Some restrictions may apply.
What are the advantages of term life insurance?
• Flexibility to choose from many different coverage periods
• Low initial cost compared to permanent insurance
• Large amounts of coverage can be purchased relatively inexpensively
• May be good for temporary needs such as a mortgage or car loan
What are the disadvantages of term life insurance?
• Premiums can increase at renewal as you grow older
• Coverage may terminate at the end of the term and may become too expensive to keep at renewal
• Term policies do not build cash value
Questions? Just ask us!
