Life insurance may seem intimidating, but it shouldn’t be.
Determining the amount of coverage you need, and how long you need it for, is easy once you’ve identified your primary reasons for purchasing life insurance.
In this article we’ll help you determine whether or not you need life insurance, and we’ve explained four things you should know about life insurance before you start shopping.
Quick Article Guide:
1. Why do Most People Purchase Life Insurance?
2. Do I Need Life Insurance?
3. How Much Life Insurance Do I Need?
4. Should I Purchase Term or Permanent Coverage?
5. Compare Rates to Save Money on Coverage
Life insurance can be purchased for a variety of reasons including; business protection, collateralizing an SBA loan, or to protect an estate from estate taxes. However, the vast majority of Americans purchase term life insurance to protect items included in the acronym D.I.M.E.
Debt: to pay off credit cards, car note, business loan, or other items
Income: to replace the breadwinner’s lost income
Mortgage: to pay off the mortgage balance and/or five to ten years of property taxes
Education: to pay tuition and related expenses in order to give their children a good start in life
If you’re like most Americans, you probably have a few reasons to buy life insurance…In fact, 85% of Americans acknowledge that they need life insurance, however, according to a Barometer study completed in 2015 by LIMRA and Life Happens, only 62% of Americans actually own life insurance.
“That’s because life insurance is too expensive.”
80% of Americans assume life insurance is much more expensive than it is. In fact, the majority of Americans actually believe that life insurance costs three times more than it actually does. What’s even more frightening is that this misconception prevents many people from even considering buying life insurance.
Some of the other reasons that people avoid buying life insurance include fear of buying the wrong type of insurance, making a bad decision, or not understanding the policy they are buying. Below are the four most important things you should know about life insurance before you decide to purchase life insurance.
Depending on your situation, life insurance may not be essential. For instance, if you’re young, single and do not have children, you probably don’t need life insurance. On the other hand, if you have student loans that a relative co-signed for, or if you are planning on having children, getting married, or buying a house sometime soon, it might not be a bad idea to get the life insurance process started. Buying a life insurance policy when you are young and healthy will save you money in the long run.
As we get older, our need for life insurance decreases as well. If you’ve reached retirement age, have enough savings set aside, and have started collecting your retirement benefits, you might not need life insurance anymore. Common reasons to buy life insurance later in life include pension maximization, leaving an inheritance, protecting your estate from taxes, and paying for burial costs and final expenses.
Life Insurance is commonly purchased for for pension maximization. If you need to to determine if you can save money by buying life insurance instead of electing the joint-survivorship option your pension offers, be sure to apply early. Life insurance can take a few months to get approved especially if you have a lot of medical records. Make sure you apply at least 12 weeks in advance of your pension decision deadline so you have plenty of time to review your options. If the life insurance doesn’t save you money each month, don’t buy the coverage.
Leaving an Inheritance
Additionally, if you want to leave an inheritance, make sure you have your beneficiaries picked out before you purchase a policy. Unlike your personal items, life insurance will keep your loved ones from arguing. The money that you want to leave behind will be sent to the beneficiaries listed on your life insurance application anonymously. You can also use life insurance to divide your possessions equally amongst your children.
For Example: Let’s say you own a home worth $350,000, and your daughter wants to move into your house with her family when you pass away. Your son, on the other hand, needs cash to fund his business. In order to keep both children happy, you can leave your son a $350,000 life insurance policy to even your estate. This will also your daughter to keep your home without guilt or feeling pressured from your son to sell it.
If you are interested in leaving a legacy, you may need to create a trust depending on the size of your estate, or the total value of your assets. When creating a trust, you will need to list a relative that is reliable and financially stable. Most people hire a third party to avoid listing a family member. The most common trustees for large estates are wills/estate/trust attorneys and some banks also offer this service.
Your trustee is someone who is responsible for carrying out your final wishes and having a non-biased professional handle these responsibilities will likely avoid conflict within your family after you are gone.
If you are buying life insurance to pay for your final expenses or your burial costs, your beneficiaries are especially important. Your beneficiary or beneficiaries will be responsible for coordinating your funeral and burial costs as well as settling any final expenses that you may have left behind. This is especially important if you have any large debts that need to be settled.
You may not need life insurance if you have already have enough money set aside for your burial costs, have already paid for a plot, or if you don’t have any sizeable debts that will be left behind for your loved one’s to settle. If you have any very serious health issues, you may find that saving your own money and “self-insuring” is more economical than buying a small burial policy for $5,000 or less.
We’ve explained the two most common ways to determine the right amount of coverage for your needs below:
This is the most common way to determine the amount of life insurance coverage needed. In order to calculate the amount of life insurance you need to replace, subtract your current age from your planned retirement age. Once you’ve determined the amount of working years you have left, multiply this number by your current income.
For example: If you are 45 and plan to retire at the age of 65, you would need to replace 20 years of income. Multiply your taxed income by 20 (which is the number of years you are looking to replace), and you’ll have the amount of coverage you need to replace your current income until your retirement benefits kick in. Please keep in mind that this is a generalized way of determining how much coverage to buy. If your situation is more complex, you may want to buy your policy based on your current needs.
To determine if purchasing life insurance is a necessity, you must calculate your total debts (or “needs” for life insurance), and purchase a policy that is large enough to settle them after you pass away. This approach is much more individualized.
For instance: Let’s say you have a mortgage with a balance of $250,000, a debt of $28,000 in car loans and credit cards, and two teenage children that you want to send to college. Your neighbors have told you to expect to pay at least $100,000 per child for college. To accomplish your needs, pay off the mortgage, eliminate your debt, and send your children to college, you would purchase a term life insurance policy for approximately $500,000. Once the amount of coverage is selected, you will need to pick a term length that will expire after all of these life events have passed.
If you have more than one life event to insure, or if your need for coverage will decrease overtime, buying more than one policy might save you money. This is also known as layering coverage. To learn more about layering life insurance, please read our article, “Layering Life Insurance.”
The needs based approach to determining your need for life insurance is more involved, but also provides a better peace of mind.
The two most common forms of life insurance are “term” and “permanent” coverage. Permanent coverage is also referred to as “whole life.” Term life insurance is the most affordable type of life insurance available simply because it is not designed to provide a guaranteed payout like whole life insurance.
Term life insurance is designed to provide a financial cushion to your family for a set period of time, and these policies are usually planned around a life event like retirement or paying off the mortgage. If you pass away before this life event is accomplished, your loved ones will have the money they need to carry out your final wishes like paying off the house, and paying the bills until they are able to return to work and/or collect retirement benefits.
Term life insurance is more affordable than other types of insurance because most people out live their coverage. In addition, with term life insurance, you pay for your life insurance only. Term life does not build a cash value, so you are not required to pay additional money each month to build an investment value.
The majority of well-known financial planners, including Dave Ramsey and Bob Brinker, will tell you term life insurance is the only type of life insurance you should buy. This is because cash accumulation life insurance policies are a poor investment vehicle. In addition, you always want to keep your investments and your life insurance separate. Keep your cash free and accessible in cash of an emergency, and don’t take the risk losing your life insurance if the stock market bottoms out.
With Term Life Insurance, you pay for your coverage only. This keeps your premiums affordable allowing you to invest into more lucrative investments like paying off your mortgage early or maximizing your 401k. If you still need a small amount of coverage for final expenses once these life events have passed, you can convert your term life policy into a permanent life insurance policy. Most people convert their term policies into permanent policies for $50,000 or less, but you can up to the full face amount of your existing policy.
Permanent Life Insurance
If you need permanent life insurance, you want to buy a guaranteed universal life or G.U.L. insurance policy. Unlike non-guaranteed universal life insurance, these policies do not require an investment. You are paying for the cost of your life insurance only, just like term life insurance.
Rather than guaranteeing your rates for 10, 15, 20, 25, or 30 years, you can pick the age that you would like your coverage to end. Most of our companies offer policies with guaranteed coverage age rates until the age of 85, 90, 95, 100, 105, 110, and 120. These policies are also commonly referred to as “term-to-90”, “term-to-95”, “term-to-100”, “term-to-105”, etc. due to their similarities to term life insurance. To read more about G.U.L. insurance, please see our article, “What is Guaranteed Universal Life Insurance?”
Avoid I.U.L’s and Non-Guaranteed Universal Life
Most of the people we work with are surprised when they finally read all of the fine print in their “cash-building” life insurance policies. The biggest surprise is that the cash value in your policy is never really your money. The money is being set aside to pay for future life insurance premiums that will increase with age.
If you take the cash value out of your life insurance policy, its considered a loan. In turn, the death benefit your policy provides will be reduced by the amount of the loan until it is repaid, with interest. Don’t forget the “cash surrender fee” your charged to access your own money.
Cash building policies, have a bad rap in the insurance industry because most of these policies under-perform and earn interest much slower than anticipated. These minimal gains are then consumed by “money management fees”, “annual investment fees”, and a rising COI or cost of insurance. As a result, people are often forced to surrender their coverage later in life when they need it the most because it becomes un-affordable. Don’t take our word for it, here’s what Forbes has to say.
Not all life insurance companies are the same…Most life insurance companies only offer coverage to young and healthy applicants, while others specialize in insuring older clients, or people with health issues. Some companies even specialize with diabetics, cancer survivors, people who suffer from circulatory issues, etc.
Sadly, the companies that advertise the most tend to charge the most (someone has to pay for those expensive Super-Bowl commercials). The insurance companies that specialize in home and auto policies are the most expensive companies to buy life insurance from. Many people make the mistake in purchasing from these companies because they are the most well-known.
The problem is, these companies focus on maintaining a competitive edge in the home and auto insurance industry, not life insurance. Simply put, they are not competitive with companies that primarily sell life insurance like Prudential, AIG, and Transamerica. By having access to so many companies, in some situations we have been able to save our clients as much as 73%.
Did you know that State Farm only accounts for approximately 2% of the life insurance policies sold in America? When I first entered the life insurance industry, I was under the assumption that they were one of the biggest insurance companies in the world. I am not alone because many of our clients believe this as well. Take a look at the chart below. Rates are listed from four different companies for a 60-year old male buying a 20 year policy for $250,000.
Actual Rates for A 60-Year Old Male In Excellent Health – $250,000, 20-Year Term
|Company||Prudential||North American||Principal||State Farm|
*Monthly rates are accurate as of 07/31/2017 and are provided for illustrative purposes only.
Actual Rates for A 60-Year Old Female In Excellent Health – $250,000, 20-Year Term
|Company||Prudential||North American||Principal||State Farm|
*Monthly rates are accurate as of 07/31/2017 and are provided for illustrative purposes only.
As you can see, some of these well-known companies are priced almost 25% less than State Farm. By shopping the market you could save you as much as $9,336.00 over the course of a 20 year policy…That’s almost $10,000! Saving so much money on a single insurance policy opens the possibility of investing your income elsewhere.
Here’s the real kicker: All of these life insurance companies have to pay into the same life insurance guarantee fund set up by the insurance commissioner in your state. What this means is if any one company has financial difficulties, your state’s guarantee fund will transfer your life insurance policy to a different and more stable company. If this fails, then your state’s Central Guarantee Fund will insure your benefits, which is usually up to $300,000.
Additionally, our clients who are in less than perfect health tend to save even more on their insurance. “Big-box” companies focus primarily on Home and Auto Insurance, and they typically shy away from applicants who have a few health issues. We’ve saved some of our clients as much as 73% by applying with other lesser-known companies that are also Superior rated for their financial stability by AM Best. Lastly, it should be noted that all of the companies listed above have been in business for more than 100 years, with the exception of State Farm.
In this article we’ve covered some of the basics of life insurance to try to help demystify the process. We’ve also included some sample rates to give you an idea of how affordable life insurance can be. If have questions about which type of life insurance is the best for your needs, or whether or not you need coverage at all, please feel free to give us a call. We can shop the market for you in just a few minutes to find your best options for affordable protection.
We Can Help You Save On Your Life Insurance Policy Too!
At Term Life Advice we proudly work with over 60 top-rated life insurance companies and our shopping services are free. All of the companies we work with are “A” rated by AM-Best, and there is no cost to apply for coverage.
We will compare rates and options from dozens of leading providers to find the company that is able to offer you the best product and the best pricing. Regardless or your age, lifestyle, or health, we’ll find the company that is best fit for you.
Every life insurance company has a niche; some companies are better for seniors with health issues, while other companies specialize in young and healthy people with no health issues. By working with five to six times the amount of companies as our largest competitors, we know you will be confident with your decision.
Our agents do not have quotas or pushy sales tactics, we’re here to help. Give us a call Toll-Free at: 855-902-6494, or you can request a free quote online below to instantly compare rates from dozens of companies.