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Life Insurance: Who needs it? What type? And how much?

Life Insurance: Who needs it? What type? And how much?

| March 28, 2017

Insurance is defined as protection against a financial loss. Most people have insurance - homeowner’s insurance, car insurance and health insurance - but forget to protect their own lives in the event of their untimely death.

We recommend life insurance to any individual who has dependents who rely upon their income and believe this is a very important part of a secure financial plan. Life Insurance, which comes in many forms, can be used to help cover large financial expenses, funeral expenses, remaining mortgage balance, children’s college expenses and outstanding debts. It will give the owner of the policy peace of mind knowing their family will be protected if they unexpectedly have to leave them behind.

Most young folks believe they will live forever and aren’t planning that far in the future and as others approach their 50’s and 60’s they are more difficult to insure.   The ages of 30’s to 40’s is a great time to start looking for reasonable rates. Life insurance premiums vary depending on factors such as age, gender, tobacco use and current health.

The two most popular types of life insurance are term and permanent insurance. Term life insurance a pure death benefit. It has a specified premium amount that pays a fixed death benefit amount to the owner’s beneficiaries if their death occurs within a specified time period, typically 10, 20 or 30 years.   After the specified term expires the previous premium amounts are no longer guaranteed. This is historically the most cost effective type of insurance.

Permanent insurance is a phrase used for policies that do not have an expiration date and have both an accumulated cash value in addition to a death benefit.   It is meant to cover your whole life. These are much more confusing and complex policies. The premiums tend to be higher with a permanent policy which allow for the accumulation of the cash value. The accumulation of a cash value allows the policy holder, in some cases, the ability to withdraw or borrow against the policy. This type of policy is used commonly for an investor who is looking to create liquidly in order to pay estate taxes.   The two main types of permanent insurance are whole life and universal life.

How much insurance is adequate? This is a very hard amount to calculate precisely but you can make a sound estimation based on your current financial situation. Many employees are provided with term insurance in the amount of 2-3 times their salary from their employer.   While this may be appropriate for a single individual, and some coverage is better than no coverage, this amount will likely to leave many loved ones in distress.   An easy way to calculate the amount of needed coverage is to estimate your long term financial responsibilities and subtract your current assets.   The difference between those numbers is the amount your life insurance policy will need to cover.