Brian Gruss Licensed Insurance Planner

The Life Insurance Balancing Act: How Much and What Type?

Calculating the right amount of life insurance takes a lot of research, and can be quite a balancing act. You want to make sure that you have enough life insurance to adequately protect your family if something happens to you. On the other hand, if you buy too much life insurance, you’ll feel financially strained-which means you’ll be more likely to cancel your policy in a crunch.

The goal is to have enough life insurance to safeguard your family without breaking your budget. If you’re trying to figure out how much life insurance you need, here are a few things to keep in mind:

Find the right policy

There are two basic types of insurance policies: term insurance and cash-value insurance. Term life insurance covers you for a specified amount of time, anywhere from one to 30 years. These policies are less expensive because they are designed solely for protection. Many people choose term insurance because they figure their need for life insurance will decrease as they get older. Term insurance is also good option for those who want to protect their children until a certain age.

Cash-value life insurance covers you for your entire life and includes whole life, universal life and variable life policies. These policies act as both an insurance plan and a savings tool, which makes them more expensive. Because the insurance company actually invests some of your premium, this type of policy increases in value over time. You can borrow money from the policy, although outstanding loans will be subtracted from the ultimate death benefit. In most cases, both the premiums and death benefit remain the same throughout the life of cash-value policies.

Figuring the right amount

There are a few different ways to calculate the amount of life insurance you need to adequately protect your family. Some experts say that you should simply multiply your annual income by three times while others say you need at least eight times your annual salary.

However, many professionals say this “income multiplication” method is not accurate enough. Because each family faces a unique set of circumstances and needs, you may want to consider some factors other than annual income. Figuring out the right amount life insurance requires a comprehensive evaluation of your financial goals, debts, investments, lifestyle and habits.

Expenses to consider

As you try to determine how much life insurance you need, you should think about the expenses your family would face if something happened to you. Start by making a list of short-term expenses, such as medical and hospital expenses, funeral arrangements, attorney fees and outstanding debts, taxes and loans. Then add that amount to all the long-term expenses your family would face, such as your home mortgage, college tuition for your children and living expenses.

You should also factor in other sources of income, such as your spouse’s salary, Social Security survivor’s benefits and investments. And don’t forget to consider the cost of inflation. Once you take all of these expenses and sources of income into account, you’ll probably arrive at a much more realistic amount than simply “four times your income.”

What can you afford?

Although you may know how much life insurance you’d like to offer your family, you have to be realistic about how much you can actually afford. The primary objective of life insurance is to protect your family. Therefore, you should choose a policy that you can comfortably fit into your budget so you won’t be tempted to cancel it.

Research shows that half of all people who buy a whole life policy end up cancelling it within the first 10 years-most likely because these policies are expensive, and it can be difficult to keep up with the premium payments. Because term insurance is relatively inexpensive and easy to understand, it may be the perfect solution for families on a budget.

Figuring out how much and what type of life insurance you need is a complex process that involves a lot of research and thought. You should meet with a financial advisor or insurance expert, who can help you determine how much insurance you need and what you can realistically afford.

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Buy Term Insurance Based on Benefits Not Price

Many of you have large life insurance needs and not-so-large life insurance premium budgets.  We can usually meet your insurance needs at a price you can afford by using term life insurance rather than a cash value product.

One of the primary reasons people buy term life insurance is its extremely low cost.  But costs can be deceiving-what seems like a great deal at first isn’t such a bargain when you look more closely.  Why is this so?

Term life insurance comes in several types and there are variations within each type.  An important thing you need to remember for any term life insurance-if you miss a payment, your insurance is gone.  You may be able to get it reinstated, but don’t count on it.

The least expensive form is often “Annual Renewable Term” (called ART).  ART is so cheap because the premiums rise each year.  With ART, what was a bargain initially quickly becomes a burden.

A more expensive (at least initially), but more predictable form is called “Level Term.”  Level term has a fixed premium for a set number of years, after which the premium increases dramatically.  This level premium period may be five, 10, 15, 20, 25, or 30 years, or even longer.  In some cases the premium is level for five years, then rises, then stays the same for another five years, and so forth.

While cost is an important issue, there are other factors that are even more important.  In reality, the cost per $1,000 of term life insurance for you is not much different from one company to another, assuming a similar product structure.  Cost is actually driven by other benefits and administrative considerations.

The most important benefit to look for is “convertibility.”  If you suddenly become very ill, you are going to want to keep your current life insurance.  Convertible term life lets you do that.  Your premium will be much higher because if you convert you will own a cash value permanent policy, but knowing the insurance is there is worth it.  Don’t buy a policy without this benefit.

Another important benefit is the ability to purchase more insurance without proving you are still healthy (insurable).  This is not a feature with many term products, but it could be an important one, and this option costs money.

Policy fees also affect the cost of your term life insurance.  Rather than have a lot of seemingly inexpensive policies, you may be better off combining them into one larger policy to reduce these fees.

Some policies offer a return of premium option-after a number of years you get all the money you paid back.  This is very expensive, but if it makes you feel better about spending the money in the first place, consider it worthwhile.

One other benefit that the lowest cost term life policies may not have is “waiver of premium.”  With waiver of premium, if you become disabled you will not have to pay any premiums during this time.  This can be a valuable benefit.

The bottom line-if you buy the “cheapest” policy, it may cost you.  You may not be able to convert it, the premiums may rise each year, you may be paying lots in policy fees, and you may have to keep paying even if you are disabled.  Know the features you need and the time frame for which you plan to keep the insurance, and look at its cost over that entire period.  Cheaper may not be better!

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The Importance of Life Insurance for Young Families

In the event of the early death of a spouse it is important to consider the financial needs of surviving family members.  It is unthinkable that the surviving family members would be forced to liquidate personal assets or lose their home simply to make ends meet.  It is essential in the present economy to protect our families from this type of financial hardship.

Recently a study found that as much as 75% of people who died between the ages of 30 and 55 left their spouses without adequate life insurance coverage.¹

Choosing the Right Coverage

It is important to be well informed when choosing what coverage is best for you and your family.  Two types to consider are permanent life insurance and term life insurance.  Whether you decide on one type or the other will be based on your specific needs.

Permanent life insurance provides lifetime coverage so long as the premiums are paid when due and also includes the added benefit of accumulating cash value in the policy.

Term life insurance or “temporary” life insurance provides coverage for a specific or designated period of time.

To fully understand your insurance needs you must outline not only the present financial needs of the family but also those projected in the future.  Financial obligations such as mortgage payments and other recurring debt payments are key to calculating the right amount of coverage needed.   Future factors may include college tuition for your children and retirement plans for your spouse.   These factors should be combined with your present source of income and that of your spouse, if any, to determine the right amount to purchase.²

Be Prepared

Since we are unable to predict the future and often life can change in an instant it is essential to plan ahead.  It is important to follow these unexpected changes with the evaluation of your life insurance coverage.  Such steps will ensure that your family remains financially secure.
1) National Association of Insurance and Financial Advisors (NAIFA) 2004
2) The cost and availability of life insurance depend on such factors as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable by having the policy approved. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely there may be surrender charges and income tax implications

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