Life Insurance – How much is Enough to protect my family?

Sometimes people buy life insurance before performing a financial needs analysis. Some might choose an amount that seems comfortable, without actually taking into account all the potential expenses their families or business might be faced with in the event of an untimely death. An objective assessment of the possible economic consequences helps determine a benefit amount that would be most appropriate for a specific individual.


Coverage Considerations:

  • Pay funeral arrangements?
  • Pay off a mortgage?
  • Offset the loss of income for surviving spouse?
  • Contribute to the future education of your children?
  • Offset estate taxes?
  • Business Buy/Sell Agreements?
  • Who would you insure under the life insurance policy?
  • How long will you need life insurance? Ready to Purchase a Policy?


Couple giving two young children piggyback rides smilingSome additional items to consider:

1. Compare life insurance quotes from multiple companies.
2, Which life insurance rate has been quoted – standard or preferred?
3. Review the life insurance broker’s availability
4. Review the medical information required to obtain the policy
5. Consider a life insurer’s financial stability and strength
6. Know about the renewal options and requirements
7. Confirm the policy can be cancelled without penalty
8. Are there conversion options and restrictions for the policy

The Life Insurance Story

Life Insurance has stood the test of time as one of the most widely purchased financial products and is represented by many large high quality insurance companies.

Life insurance is most prevalent in several basic forms: Whole Life, Variable Life, Universal Life, Term Insurance, and Employer Sponsored Group Coverage. Term insurance can be a very cost effective way to ensure against an untimely death of a spouse or major breadwinner in the family. Niche Financial Services usually recommends at least five times annual salary as a starting point and a minimum level of coverage for life insurance. You may then wish to consider a college-funding program, paying off a mortgage, debt cancellation, as well as an emergency fund over and above the minimum of five years salary. Low cost term insurance provides a very effective way to ensure a family against a catastrophe. Typically, families with young children are living on a tight budget and need the protection but don’t really have the discretionary income to buy a high level of death benefit in permanent life insurance. Term insurance may be purchased with level premiums with 10, 15, 20, 25, or even 30 years. At this point, the premium would go up significantly or the insured would need to re-qualify through medical underwriting to continue their coverage. Many carriers offer a conversion option on their term insurance but in general you can assume that with term insurance at some point in the future the cost is going to increase substantially or you may not be able to afford it. In the worst case scenario, you may not be able to get coverage as your health condition may have changed making an insurance company unwilling, unlikely, or at a much higher premium offer you a new policy and new coverage.

Permanent insurance avoids this scenario. The perfect scenario under permanent insurance would be that an individual pays a premium and as long as he pays that premium each and every year in a timely manner, should he pass away, his beneficiary or beneficiaries would receive the stated amount of death benefit in the policy. With typical Whole Life policies there may also be a dividend paid to the policy owner, which could actually act to increase the death benefit each year or at some point may accumulate to a level at which no further premiums would need to be paid. These dividends are not guaranteed but typically illustrated in an optimistic manner showing that if an individual pays for a set number of years, the policy would have accumulated enough cash value so that no future premiums would need to be paid. This is the basic structure of a Whole Life policy, which was extremely popular in the 1950’s, 1960’s and 1970’s.

In the 1980’s, Universal Life came onto the scene. It first gained its popularity back in the early 80’s when interest rates were extremely high and individuals would look at the 2, 3, 4, maybe 5 percent returns in their Whole Life policy and said, “Wait a minute, this doesn’t seem to be competitive.” Universal Life was designed to try to assist Life Insurance policyholders to be able to get more competitive interest rates on the cash values in their policies. Policies were designed that had term insurance premiums deducted from the cash value every month and then the balance of the money was invested in the insurance companies general fund. Then Insurance Company would pay interest contingent upon the interest rates available in the general securities markets and pass through to the policy holder after the insurance company charged certain fees and administrative costs. This allowed the flexibility of a floating interest rate in the policy. If interest rates were much higher, the insured would be able to reap the benefit of a higher interest rate return on the policy cash values. And then, the stock market came into style. Folks with cash value life insurance policies said to themselves “I am making money in the stock market and my life insurance policy does not have near the return of a mutual fund.”

Variable Universal Life came into existence. With an underlying term insurance cost, certain fees and administrative costs deducted, individuals could invest their life insurance cash values in mutual funds and also realize the tax advantages available in life insurance. With optimistic stock market return projections and low cost term insurance as the underlying cost driver, Universal Life looked like a great way to buy life insurance and be able to obtain the best possible returns on cash value. However, as we all know the stock market is not always kind and investors can lose substantial amounts of money. If the stock market has negative returns, premiums could be increased considerably to make up for losses in the policy cash values.

Employer sponsored plans are just that, employer sponsored. An individual has little control over the amount of coverage that they can obtain whether or not it would be discontinued and limited options as far as increasing and decreasing the amount of coverage. However, employer sponsored plans usually make underwriting concessions, which means that people with health conditions which may precluded from getting insurance on their own may be able to have employer sponsored coverage. This gives them the ability to obtain life insurance through an employer, which may be a good option.

One additional type of life insurance is accidental death coverage. This type of insurance is basically paid only under certain scenarios. For instance, it would not pay a death benefit for sickness such as cancer or heart disease. However, it may pay in the even of a fatal car accident, getting struck by lightning or some type of accidental catastrophe. One advantage of this type of insurance is its far less costly, as its very inexpensive, and is often offered as a rider on base policies. However, it must be fully understood that this type of coverage does not pay in all circumstances and a surviving spouse may find themselves without life insurance on their deceased partner if the parameters of an accidental death are not met.

Variable insurance guarantees are based on claims paying ability of the issuer. Withdrawals made may be subject to fees when distributed and treated as ordinary income. Outstanding policy loans at death and withdrawals will reduce the policy death benefits and cash values. The investment returns and principal value of the available sub-account portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than their original value.
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