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family finance term life insurance

“How Much Life Insurance Do I Really Need?”

The question usually comes up in regard to insurance planning: “How much life insurance do I really need?” This implies of course that the belief is held that either the amount recommended is incorrect or perhaps the insurance isn’t needed altogether. 

We’ll go over a specific scenario below.

Richard writes in: “I’m 36, recently married, and my wife has two kids from a prior marriage. As soon as we started to get serious, we met with a financial planner and of course one of the first things the planner wanted to talk about was insurance. He immediately recommended a $1,000,000 term policy.

I have a policy for $50,000 at work, so I should be covered, correct? Why would my beneficiaries need more than that? It should cover burial costs and give them something left over too if I am to pass.”

Richard, thanks for writing in. For starters, the planner has one advantage that I don’t: the ability to ask you questions in a more direct format. 

That being said, I will speak first more generally and then get to specifics.

In general, if a person has a need for life insurance, their policy at work is usually not enough. 

The reason being is that yes, it could be enough to cover burial costs but usually if you have a need to do that, it means that you have other dependents that will rely on more than that and were likely relying on your income. 

Now this gets into the specifics as to whether your work policy is enough or not. Your planner likely asked if your new wife and her children are dependent on your income, or if your wife is able to support herself if something happened to you.

If your wife and new children are unable to support themselves in the event of your passing, they will need income replacement likely for perpetuity, not just a few years.

This is where the idea of a large term policy (around $1,000,000) comes into play. That large of a face amount placed into an interest-bearing account should give your beneficiaries a sizable income to help replace the income they lost from your passing. 

I hope this information helped, Richard.

 


Thank you for reading and feel free to leave a comment below to have your question featured. 

This article should not be considered legal or tax advice. Always consult a professional for advice on your specific situation.

 

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term life insurance

What is Level Term Life Insurance?

Wading through the world of life insurance can be a headache just waiting to happen, especially when you are wondering if the person on the other end of the table attempting to sell it to you has your best interests in mind.

There’s a few different types of temporary life insurance, and a whole world out there of permanent insurance; as a side note, make sure you know exactly what you’re getting if you decide to go the permanent route.

But here we’ll be discussing only one type of temporary life insurance so your head hopefully won’t be spinning after you’re done reading.

So What Is Level Term?

To make it as simple as possible, level term life insurance can be explained as working for your life as car insurance does for your car. You pay premiums to an insurance company that agrees to pay your beneficiaries the death benefit (face amount) if you are to pass in the allotted time that you had bought the insurance for.

There’s a Time Frame They Allow You to Die In?

Kind of. This is essentially where term life insurance and car insurance differ. The insurance companies knows that there is a chance you may never get into a car accident. However, there is a 100% chance that everyone will eventually die.

So what the insurance companies do in exchange is lock in premium rates for a certain amount of time (usually 10, 20, or 30 year increments). The premiums are guaranteed not to increase during this time as long as the policy does not lapse.

This is also why term life insurance is so much cheaper than permanent insurance; there is a good chance that you will not pass away in that 10-30 year period, so the cost of insurance is lower. However, a policy that covers your life permanently is guaranteeing to pay out, meaning the cost of insurance has to be high enough to pay a claim for an event that is supposed to be guaranteed to happen.

So What Does ‘Level Term’ Mean?

This is where the phrase ‘level term’ comes into play. Essentially, it is your premiums that are level throughout the life of the policy. The cost of insurance increases as a person gets older because statistically there is a higher chance of passing away at older ages. Level term life insurance has these cost of insurance changes already built into their premium costs over the term of the policy.

Because the cost of insurance is already built into the product, the longer the term that an insured locks in will cause the monthly premiums to be higher. This is of course because someone is more likely to die within the time period chosen if they choose to be covered for 30 years as opposed to 10 years.

 


This article does not constitute financial advice. For information regarding your specific situation, please consult your local financial advisor.