Estimating your life insurance coverage needs Life insurance provides payments to your beneficiary that replaces some, or all, of your income if you die during the coverage period. These payments make up what is called a death benefit.
In exchange for insurance coverage, the insured person or policy holder makes periodic payments called premiums to the insurance company (insurer). To determine a policy premium, the insurance company will examine your application, and/or an attending physician statement, (essentially your medical records), and the results of your medical exam. The insurance company will require a physical examination. An examiner will visit you in your home or office, where they will ask you a series of medical questions designed to provide information to the insurance company about your current health status. In addition, the examiner will need to draw a sample of your blood, and check blood pressure
In order to be eligible for coverage, the insured receives a certificate of insurability. This is an endorsement of the insurance company's willingness to sell a policy. A certificate of insurability is sometimes required for certain changes in policy coverage.
Most life insurance policies are taken out to replace family income in the event of an untimely death. As a result, these policies often designate a spouse, child, sibling, or parent as beneficiary. The policy may also designate more than one beneficiary.
Flexible Premium Life Insurance Policies
Some types of life insurance allow you to change your premiums, or stop paying them for a while. These premiums are called flexible premiums. This situation occurs if the investments associated with variable or variable universal life policies, or if savings associated with indexed universal life policies, earn a higher-than-expected rate of return. This can generate higher account values that can be utilized to offset further premium payments. Likewise, if the premium being paid is the minimal acceptable amount required by the insurance company to keep the contract in-force, increased premium payments may be necessary to offset any substandard performance associated with the investments in variable life or variable universal life policies, to prevent those policies from lapsing.
An expedient way of determining the right amount of coverage is to take a multiple of your annual salary. For example, a multiple of 5 and annual salary of $50,000 would equal policy coverage of $250,000. The following five steps can help you to more accurately estimate your coverage needs: - Determine your coverage period. For example, if you think the next 20 years of your life are essential to provide for a young family, a 20-year coverage period would be appropriate.
- Calculate the expenses that require coverage. If you are the main breadwinner in the family and die suddenly, the family is sure to feel the financial impact. You might decide to buy a policy that insures half of your salary for the first 10 years of the policy and 25% for the subsequent 10 years.
- Additionally, your death will have some expenses associated with it. Funerals routinely cost five thousand dollars or more.
- You may also have other debts or funds that either need to be repaid immediately or replenished when you die.
- These could include credit card debt, school and auto loans, and outstanding mortgage obligations.
- Reduce the amount of required coverage by available assets and income. Assets that you own today can be sold to pay off debts or raise cash. Selling these assets might reduce the amount of necessary policy coverage. Keep in mind that market conditions can deeply affect the liquidity, and the value, of assets such as real estate, stocks, collectibles, etc. Social Security benefits may be available, but they only continue until the youngest child reaches age 18 or graduates from high school. The "blackout period" for the surviving spouse begins when the youngest child reaches 16, and will continue until a spouse reaches age 62.Additionally, any future income that your beneficiaries are expected to receive will reduce the coverage amount.
- Add estimates for inflation, interest rates on savings, and taxes. Inflation leads to higher expenses in the future. If your beneficiary's income fails to grow at the same rate, your coverage may be inadequate. On the other hand, if interest rates on your savings keep pace with inflation, you shouldn't have to increase your coverage. For taxation of life insurance benefits, see IRS Pub. 525: "Taxable and Nontaxable Income."
- Find other ways to lower your premiums. Since your health is a large determinant of your premiums, consider avoiding tobacco and alcohol, learn to eat healthy, and exercise regularly. A healthy medical history helps.
Skydiving, motorcycle riding, and scuba diving are activities with higher accident and fatality rates. Avoiding these kinds of "insurance risks" can help to lower your premiums.
To estimate how much life insurance you may need, see the following calculator: click here.
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