How Much Life Insurance Do I Need?

Life insurance seems like a second thought to so many people.  You’ll notice that the title of this article isn’t “Do I Need Life Insurance?”.  That’s because there really isn’t much question about whether you need life insurance or not.  I suppose there might be a few exceptions, but pretty much everyone needs and should have life insurance.  It’s just a matter of how much you need.  There’s a couple of ways to figure out how much you really need.

How much life insurance can I afford?

This is probably the most popular method of choosing life insurance.  And it’s completely wrong.  If you ask most people how much life insurance they can afford the answer is almost always “little” or “none”.  Again, wrong answer.  Most of us carry car insurance because it’s something that covers us against a loss.  If our car is damaged in an accident, we have the insurance to help with the cost of repairing or replacing the car.  To the people who depend on us for income, we need to have life insurance in place to help with the costs of continuing on when our income is lost.

How much income do I need to replace?

This question is usually a pretty good place to start when determining how much life insurance you need.  If you’re a regular budget-maker, you probably have a pretty good idea of how much income you and your family need to pay the bills and keep food in the fridge.  It’s probably not your entire salary, but it might be close.  Take into account any investments you have, as well as assets that might become unneeded if you die.  You’re family probably won’t need that second car anymore, for instance.  Also, any payments on those assets that can be disposed of can be discounted as well.

How long do I need to replace the income?

Once you know how much income you need to replace, the next question you need to ask is how long you need to replace it for.  In an ideal world, you’d be able to buy enough life insurance to set your family up for life.  Your spouse would be able to quit work and take care of the kids full-time.  You’d be able to pay for the children’s college education.  But, the world we live in is far from ideal.  Most of us won’t be able to afford the premium payments on a life insurance policy that will pay out enough to do those things.  In a romanticist world, your spouse would grieve for your loss for the rest of his or her life.  That isn’t all that likely either.  It’s far more likely that your spouse will remarry at some point.

All of that still leaves us without a real answer to the time question though, doesn’t it?  You’ll have to make some assumptions in order to really answer the question.  Assume that your spouse will get remarried.  Assume that you’re not going to be able to pay for your kids’ college education with the pay-out.  I think a good starting point is somewhere around 3-7 years.  Some will say that’s too long.  Others will say that it’s too short.  I don’t think there is a perfect answer.  And, when you’re faced with a question that has no perfect answer, you’ve got to find an answer that is as close as possible.

Calculate, then purchase.

You’ve answered how much income you need to replace, and you’ve got a pretty good idea of how long you need to replace it for.  Now, you’ve just got to put the two together and come up with how much life insurance you need.  Multiply the income number by the length and you’re in the ballpark. Let’s say that you determine that you need to replace about $30,000 a year in income.  You’re married to a real hottie, who shouldn’t have any issues with finding suitable future spouses, but you don’t want him or her to rush into it, so you use the 5 year length.  $30,000 a year X 5 years = $150,000.

You might want to add a bit extra for sudden expenses at the time of death, like funeral, casket, and burial.  But, that’s a pretty good ballpark number for how much life insurance you should buy.  Now comes the big step…  You’ve got to purchase it.  Find a good place to compare life insurance policies (Australians can check out LifeBroker Life Insurance comparison) and costs and get all the information compiled.  Then pull the trigger and purchase the policy.

That will be the hardest part of the whole thing.  If anything does happen to you, your family will be thankful that you did.

Finding Low Cost Term Life Insurance

If you’ve been considering life insurance, you’ve most likely heard financial planners and advisors tout the benefits of term life insurance. Term life insurance is known as the cheapest and most popular type of policy available. This is because there are dozens of different kinds of term life insurance policies addressing every life situation you may be facing, not to mention the fact that it is typically the most affordable coverage for a person of any age. Determining the best type of term life insurance for you depends on multiple factors, including your age, health, present and future income, assets and liabilities.

Term Life Policies

There are many types of term life insurance policies, among them level term, increasing and decreasing term, high risk, survivorship, group, guaranteed, no exam, and mortgage life insurance. Level term offers a low, fixed premium and stable death benefit for a term of 5, 10, 20, or 30 years. With decreasing or mortgage term life insurance, the death benefit and premiums decrease each year based on the insured person’s age or the principal owed on the mortgage, allowing the cost of the policy to adjust as your income increases year after year.

Decreasing term life insurance, similar to mortgage life insurance or credit life insurance, is usually used to cover a debt like a mortgage loan and both the death benefit and premiums decrease over time as you pay down the liabilities. Banks, lenders, or financing companies may sometimes require life insurance as collateral for a business or personal loan, too.

Renewable

Some term life policies may be renewable at the end of the term. It is important to check the policy provisions to see if a medical exam or physical is required at the time of the policy renewal. Generally, renewable life insurance offers more benefits to young individuals or parents since rates of renewal policies are not as cheap as an insured person grows older. Renewable policies are a low cost alternative to permanent life insurance policies – whole and universal.

Convertible

Young people may want the benefits of whole or universal life insurance, but not be able to afford the premiums in their budgets. Convertible term life insurance allows the policyholder to change or convert the type of policy from term to whole or universal life when their budget permits.

With convertible life insurance, families and seniors still have the protection of affordable term life with the option to purchase additional coverage with options at a later date. This is a good low cost option for individuals who intend to use life insurance as part of financial planning.

No Exam

If, for any reason, you think you would be ineligible for or denied coverage by the insurance company, you can apply for a no medical exam policy. Although the premiums will be higher, this type of life insurance exempts you from the usually physical exam and blood tests required for underwriting. Instead, you will be asked to answer questions regarding your current state of health as well as offer a full medical history. The death benefit is typically limited, but older applicants or ones with pre-existing health conditions are able to get enough protection to cover final expenses. Other terms and conditions or exclusions may apply, such as no payout or claims covered for the first 2 years after issuance, so read the fine print when considering no exam life insurance.

Who Should Buy Term Life?

Since rates are largely based on the age and health of the insured person, a term life policy offers the cheapest premiums and greatest advantage to young individuals in good health because they can lock in the cheapest premiums for 20 to 30 years.

Beyond the probable fact that most Americans need life insurance, protection is most essential if you fall into the following categories:

  • you’re married
  • you have kids or dependents
  • you’re single but have financial dependents or loan co-signors (i.e. your parents for student loans)
  • you have grown children and want to leave them an inheritance, and need a policy to cover estate taxes

The bottom line is – any time you have someone financially dependent on you, you likely need to buy life insurance.

Gary Dek writes at MyLifeInsuranceQuotes123.com, a site focused on providing comprehensive life insurance guides to help consumers find unbiased information on policies, coverage options, and insurance companies. Previously, Gary was an investment banker and private equity analyst.

In a Car Accident? Should You Pay Out of Pocket for Repairs?

Our Chicago winter this year has been a lot less like a Midwest winter–the snow storms have been few and far between.  A few weeks ago we finally got hammered by a storm that dumped 10 inches over the city.  At the height of the snow storm I had to pick up my son from school.  As I waited at a stop sign, the driver behind me bumped into my bumper.

Luckily, the damage wasn’t bad.  When I took it to a repair shop for an estimate, they thought it would cost between $580 and $1,200 to fix depending on if there was any damage inside the bumper when they take it off to repair it.

Surprisingly, the woman who hit me decided she wanted to pay out of pocket rather than go through insurance.  When I told her that the repair would take 2 to 3 days and we’d need a rental car during that time, she agreed to cover that cost, too.

This is the second time I’ve been rear-ended in 5 years, and both times the repairs were less than $2,000.  Both times the drivers opted to pay out of pocket.

If you’re in a minor fender bender, should you pay out of pocket rather than going through insurance?

Reasons You May Want to Pay Out Of Pocket

Pay out of Pocket for Repairs1.  If you have a high deductible.  If you have a deductible of $1,000, for example, paying out of pocket if the repair is just a few hundred dollars over that amount may make sense.  You’ll save yourself from an increasing premium.

2.  If your insurance premium will increase substantially.  Each insurance company is different, but rest assured that if you cause an accident and file a claim, your insurance will increase.  Some insurers increase your premium by 10% and others by 20%.  You may be able to call your insurer and ask how much the premium will go up before you decide to pay a claim or not.

3.  If this is your second accident.  While you’ll pay an increased premium for one accident, if you file two claims within a few years of one another, the increase is substantial.  For instance, State Farm generally charges a 10% increase in premium for the first claim, but that amount increases to 45% for the second claim.  While it may hurt your budget to come up with a thousand or two to pay out of pocket for the repairs, that may be the better option if you’re facing a substantial increase that could last several years.

4.  If your insurance doesn’t have an accident forgiveness clause.  Some insurers offer an accident forgiveness clause, meaning, if you’ve been with the company for a certain number of years (usually 5 to 9) with no accidents, the insurance company won’t increase your premium on the first accident you file.  Again, though, you may want to save this benefit for a more substantial accident that you can’t afford to pay out of pocket rather than when the repair is relatively minor.

If you cause an accident, don’t automatically file a claim.  There are benefits to paying out of pocket.  You just need to understand your insurance policy as well as know exactly how much the repairs will cost before making a decision.

If you’ve caused an accident, did you pay out of pocket rather than filing a claim?

Original img credit: Oops, by fortes on Flickr