Your Life Insurance Needs

1. Your Life Insurance Needs

2. The major purpose of life insurance is to provide financial security for dependents in the event of death. Here we want to consider factors that influence how much insurance you might need. The multiple earnings approach is simply a rule of thumb. Using the rule would have you buy some multiple of your annual gross earnings. The multiple could be any value greater than one. The needs approach is more of a plan than the multiple earnings approach. In the needs approach you estimate the resources needed if the individual were to die, determine all financial resources that would be available after death and then take the difference between the two to determine the life insurance required.

3. Economic needs after death Provide family income. A question to ask is what standard of living do you want the survivors to have? Typically folks want survivors to have the same standard of living as they have become accustomed to with their current income. Household expenses may be increased if a spouse dies because of household chores done by that spouse. The expenses would be incurred to do those tasks - tasks such as child care, cooking, cleaning and the like. The ability to pay off debts may be a goal you have. That way the survivors could start off fresh. Surviving spouse may need some income during a transition period.

4. Some will want to insure for special needs such as children’s college education or special care for a child or elder parent. Liquidity may be needed because although the survivors may have a great deal of wealth, the wealth may be tied up in land or other assets that are hard to sell-off without risk of loss. Available Resources Available resources that can reduce the amount of insurance you need include savings in the bank investments social security benefits employer-sponsored policies and death benefits surviving spouse’s income ability other assets like home

5. Insurance need = economic needs minus available resources. Insurance needs for a family will change as conditions for the family change so it is a good idea to take an inventory every few years. Note that some insurance plans will also provide protection from creditors, can act as a savings plan and may have some tax benefits as life insurance proceeds are typically not taxed. Next let’s consider types of policies. We will study term, whole life and universal life insurance, as well as some other types of coverage. Note, when you pay for insurance the payment is often called the premium.

6. Term Life Insurance With straight or level term policies the straight refers to the idea that the benefit is the same over the term of the policy. The premiums may rise each year or stay the same, depending on the policy. The logic of policies that have increasing premium is that you are more likely to die in later years and therefore the company is more likely to payout. Decreasing term policies have the same premium payment each period, but the benefit decreases each year. Folks who feel there coverage needs will decline over time (kids are becoming self-sufficient, the mortgage is declining, etc...) might like this policy. Term policies usually have a renewability provision where you get the same coverage without having to show evidence of insurability. This covers you in case you become ill at the end of one term. Make sure policy has one if you want one.

7. Some term policies allow the policy to be converted to a whole life policy. Whole Life Insurance Whole Life provides coverage throughout the life of the individual. But also has a saving feature called the cash value. The cash value can be borrowed or withdrawn down the road in a tax free fashion. Continuous premium plans have you make the same payment each year for life, while limited payment plans have you stop paying premiums after a certain point in time.

8. Universal Life A universal plan would have you pay into a savings type account and earnings can accumulate. From the account you pay for a term policy. The advantage here is if the accumulation over time becomes large enough you can skip a premium payment. Often the company will say you earn a minimum they guarantee, but you can earn more if the accounts investments perform well. Make sure you find out what is the basis for the account to earn.. 90 day government securities is a common rate. Make sure you know what your options are. As with all insurance plans, find out what types of fees and commissions are charged on the universal policy. Let’s turn to other types of policies.

9. Variable Life Policies are like universal policies, but variable life policies are more like investment vehicles where there is no guarantee of a return. This could jeopardize the life insurance portion of the policy. Joint life insurance insures both spouses and pays out when the first one dies. This might be useful for two earner families. Survivorship life insurance pays when the second spouse dies. This is useful when there will be large estate taxes to pay. Group life covers many, like employees of a company and the benefit is like a term policy. Credit life and mortgage life policies pay of loans in case of death. Deferred-premium life insurance - college students are targeted. The coverage is purchased with interest bearing debt. Authors say this is usually not a good idea. What do you think?