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FAQS – Life Insurance
Q: How much life insurance should an individual own?
A: “Rule of thumb” suggests an amount of life insurance equal to 6 to 8 times an individual’s annual earnings. However, many factors should be taken into account when determining the right amount of life insurance for you and your family.
Important factors include:
- Income sources and amounts other than salary/earnings
- Whether or not you are married and, if so, what is your spouse’s earning capacity
- The number of children or other individuals who financially depend on you
- The amount of death benefits payable from Social Security and from an employer-sponsored life insurance plan
- Whether any special life insurance needs exist (e.g., mortgage repayment, education fund, estate planning need, etc.)
Calculating the correct amount of life insurance to buy is not as simple as it appears. We recommend contacting us for help in determining the right amount of coverage. As independent agents, we are unbiased advisers that will help you avoid buying too much, show you appropriate optional coverages for your needs and recommend a company that will best serve your interests.
Q: What about purchasing life insurance on a spouse or children?
A: In certain circumstances, it may be advisable to purchase life insurance on children; generally, however, such purchases should not be made in lieu of purchasing appropriate amounts of life insurance on the family breadwinner(s). It is of utmost importance that the income-earning capacity of the primary breadwinner be fully protected, if possible, through the purchase of the required amount of life insurance. This should be done before contemplating the purchase of life insurance on children or on a non-wage-earning spouse. Life insurance on a non-wage-earning spouse is often recommended for the purpose of paying for household services lost due to this individual’s death. In a dual-earning household, it is important to protect the income earning capacity of both spouses.
Q: Should I purchase term insurance or cash value life insurance?
A: This is a difficult question, as the answer will vary depending on your personal circumstances.
First, recognize that in any life insurance purchasing decision, two questions must be answered:
- How much life insurance should I buy?
- What type of life insurance policy should I buy?
The first question should always be resolved first. For example, the amount of life insurance that you need may be so large that the only way you can afford it is through the purchase of term insurance, which has a lower premium.
If your ability to pay life insurance premiums is such that you can afford the desired amount of life insurance under either type of policy, it is then appropriate to consider the second question: what type of policy to buy. Important factors affecting this decision include your income tax bracket, whether the need for life insurance is short-term or long-term (e.g., 20 years or longer), and the rate of return on alternative investments possessing similar risk.
Q: How does mortgage protection term insurance differ from other types of term life insurance?
A: The face amount of mortgage protection term insurance decreases over time, consistent with the projected annual decreases in the outstanding balance of a mortgage loan. Mortgage protection policies are generally available to cover a range of mortgage repayment periods (e.g., 15, 20, 25 or 30 years). Although the face amount decreases over time, the premium usually remains the same. Also, the premium payment period often is shorter than the maximum period of insurance coverage. For example, a 20-year mortgage protection policy might require that level premiums be paid over the first 17 years.
Q: Can an existing life insurance policy be used to provide for the repayment of an outstanding mortgage loan?
A: Yes. An existing policy, either term or cash value life insurance, can be used for many purposes, including paying off an outstanding mortgage loan balance in the event of the insured’s death. Although a lender may offer a mortgage protection term policy to you, the lender rarely requires it. Credit life insurance is frequently recommended in conjunction with the taking out of an installment loan when purchasing expensive appliances or a new car, or for debt consolidation.
Q: Is credit life insurance a good buy?
A: Credit life insurance is frequently more expensive than traditional term life insurance. Further, if you already own a sufficient amount of life insurance to cover your financial needs, including debt repayment, the purchase of credit life insurance is normally not advisable due to its relatively high cost.