Q: How much life insurance should an individual own?
A: Rule of thumb suggests an amount of life insurance equal to 6-8 times 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 your spouse's earning capacity is
The number of individuals who are financially dependent upon 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 determining the right amount of coverage. As independent agents, we are unbiased advisors that will help you avoid buying too much, show you appropriate optional coverage for your need, and recommend a company that will best serve your interests.
Q: What about purchasing life insurance on a spouse and on 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 term insurance or cash value life insurance be purchased?
A: This is a difficult question that can only be answered 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?
If you are on a tight budget, you may opt for term life insurance which is the least expensive life insurance option you can choose.
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 under 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. Because of this reducing benefit, this product is not a popular choice today. Most folks opt for 15, 20 or 30 yr level term policies depending on their needs.
Q: Can an existing life insurance policy be used to provide for the repayment of an outstanding mortgage loan? What about accidental death coverage?
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. Is credit life insurance a good buy? Absolutely not!!!
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.
Another form of life insurance that folks often purchase is "accidental death" coverage. It is frequently sold by retailers and installment credit companies and sometimes even banks. It is extremely expensive and is for the most part a complete waste of money in the opinion of the folks at JMI.