How Do I Choose a Coverage Amount for Life Insurance

How Do I Choose a Coverage Amount for Life Insurance?

One of the most important decisions that must be made when shopping for life insurance is how much coverage to purchase. Determining the optimal level of death benefit can be a tricky decision, and there are no hard and fast rules when it comes to determining how much life insurance coverage is enough.

Fortunately, however, there are some guidelines that workers can use to determine how much coverage their families will need in the event of their deaths. When determining the best death benefit level one of the most important factors is the annual salary of the person being insured. Typically those who make a higher salary will require a higher level of life insurance coverage than those who make less money, but as with all guidelines there are some exceptions. It is also important to consider other factors, including how much the family spends on a monthly and an annual basis, the size of the family’s fixed expenses, the number of years remaining on the mortgage and so on.

Many financial advisors recommend that workers with spouses and families to support purchase a life insurance policy with a death benefit equal to between 20 and 30 times their annual salary. The midrange suggestion for many workers is 25 times annual salary. At first blush that can seem like a lot of coverage, but after some additional analysis the reason for this recommendation becomes quite clear.

Let’s consider a worker making an average salary of $40,000 per year. Let’s also assume that the worker has a wife and two small children who rely on him for their financial support. If that worker were to die unexpectedly it could take up to $1 million or more to replace that lost income. That assumes a withdraw rate of no more than 4%, a level recommended by many financial experts and based on historical returns for safe investments like certificates of deposit and U.S. Treasury securities. Withdrawing no more than 4% per year from the lump sum is one of the best ways to ensure that the money will last as long as it is needed.

When seen from this perspective, a death benefit of 25 times an annual salary of $40,000, or $1 million in coverage, does not seem so extravagant. Purchasing coverage equal to 30 times that salary can provide an additional cushion and help protect the survivors from periods of inflation and low investment returns.

Of course not every worker will need this level of coverage, and it is important to consider a number of factors before making a final decision. For example, families who have always lived well below their means may be able to get away with a lower death benefit, since not all of the worker’s annual income was spent. Those who have been diligent savers may also have built up their own nest egg – a nest egg that could be tapped to make up any shortfall left by a lower death benefit.

In the end, determining the optimal level of death benefit is a very personal decision, and one that every insurance shopper must make. Taking the time to sit down with a pen and paper – or a computer spreadsheet – can take a lot of the guesswork out of this important process. No matter what type of life insurance coverage is ultimately chosen, the most important thing is to choose a policy that provides the highest possible level of coverage at the lowest possible cost.

Play around with our life insurance calculator. Know that this is only an estimate and every scenario deserves a personal consultation.

Please call us so we can talk about your life insurance needs. 1-877-872-7071

What Does Life Insurance Accomplish

What Does Life Insurance Accomplish?

Life insurance is an important purchase, and there have been many instances where a generous death benefit has saved a family from financial ruin. Life insurance is something that none of us are anxious to think about, but it is important for every responsible adult to consider his or her life insurance needs. Life insurance does much more than protect the life of the insured – it also protects the family members and loved ones who are left behind.

There are many benefits to having a well funded life insurance policy in place. First and foremost life insurance provides a death benefit that the beneficiaries can tap in the event the family’s breadwinner dies before his or her time. The lump sum payment provided can be used to pay the family’s living expenses, including rent and mortgage payments, utility bills, heat for the home and more. Without these funds coming in the family members left behind could suffer severe financial stress in addition to the severe mental stress that always accompanies the death of a loved one.

But term life insurance coverage can do much more than pay the day to day bills. Life insurance proceeds can also be used to pay off the family home, relieving the surviving spouse and family members of their single biggest monthly expenditure. The absence of a monthly mortgage payment can provide some much needed breathing room to cash strapped families and relieve them of the risk of losing the family home to foreclosure.

The proceeds from a life insurance policy can also be used to pay the college tuition of any children in the family, freeing them from the crippling debt burden that all too often comes with a college degree. This will allow those young people to enter the workforce without a mountain of debt hanging over their heads. Large college debts can pose a real problem for young people seeking their first jobs, and in some cases it can even derail a promising career as hard financial choices must be made.

While all of these advantages are important reasons for carrying life insurance, there is another benefit that may be the most important of all. Having sufficient life insurance coverage in place can allow the surviving spouse to stay home and spend time with the children instead of having to go back to work. Family time is precious, and much of it can be lost when a former stay at home mom or dad has to return to the workforce following the untimely death of his or her partner. A well funded life insurance policy with a generous death benefit can allow the surviving spouse to continue his or her role as the primary caregiver to the children left behind. Of all the many advantages of life insurance, the ability to spend more time together as a family is perhaps the most important and the most profound.

How to Upgrade a Life Insurance Policy

How to Upgrade a Life Insurance Policy

Life insurance is an important purchase, but it should not be a one time purchase. Simply buying a term life or whole life policy in your twenties and forgetting about it is not enough. It is important to revisit that initial life insurance decision from time to time. This is the best way to ensure that your family is truly protected and that they will have the stream of income they need in the event of your untimely demise.

If it has been a number of years since you last reviewed your life insurance coverage ask yourself this question – have there been any changes in my life in the past 5 or 10 years? If you are like most of us the answer to that question is a definite yes. Perhaps you have changed jobs, or even changed careers. Maybe you got a big raise last year, or your family moved to a larger (and more expensive home). No matter what the changes in your life chances are good that they will affect the amount of life insurance you need. A periodic checkup will help you to identify these changes and make the changes that need to be made.

One of the most important factors driving the amount of life insurance coverage you need is of course your annual salary. Many financial advisors urge their clients to purchase life insurance with a death benefit equal to between 20 and 30 times their annual salary. While this can seem like a great deal of coverage, it is actually the amount of money your family will need to replace your income. A higher income means a higher death benefit is probably in order.

In most cases upgrading an existing life insurance policy will be a simple and straightforward process. If you purchased your original life insurance policy from an agent, that agent is a good place to start. Begin by contacting the insurance agent and asking about possible upgrades and additions to the policy. Most good life insurance agents will be happy to help you find the optimum level of coverage for your current needs. A good life insurance agent should review the changes that have taken place in your life since the policy was first enacted, including any promotions or raises, as well as life events like marriage, divorce or the birth or adoption of children. . Once this information is gathered the life insurance agent can make recommendations that will help you make the most of your policy.

While in some cases a simple upgrading of the existing policy will be sufficient, in some cases the life changes that have taken place may make a completely different kind of life insurance policy a better fit. For instance, if you have accumulated a significant portfolio of investments outside of life insurance that expensive whole life policy may no longer make sense. It may be more cost effective to cash in that old policy and invest in a new term life insurance policy with lower premiums. No matter what type of life insurance coverage you have in place, it always makes sense to review your coverage and make sure that it still meets your needs. After all, life insurance is a very personal investment, and it is important that the policy you choose be tailored to your specific needs and those of your family.