How much life insurance should you own?
Rough rules of thumb suggest an amount equal to 6 to 8 times your annual
earnings. However, there are other things to consider when determining how
much life insurance you need. Important factors include: income sources (and
amounts) other than salary/earnings; whether or not you're married and, if
so, your spouse's earning capacity; the number of people who are financially
dependent on you; the amount of death benefits payable from Social Security
and from an employer-sponsored life insurance plan, whether any special life
insurance needs exist (e.g., mortgage repayment, education fund, estate
planning need), etc. Talk to an insurance adviser for a precise calculation
of how much life insurance you need.
What about buying life insurance for a spouse or children?
Generally, that should not be done in lieu of buying appropriate amounts of
life insurance on the family breadwinner(s). It is extremely important that
you protect the earning capacity of the primary breadwinner, if possible,
with the right amount of life insurance before considering life insurance on
children or spouse. In a dual-income household, it is important to protect
the earning capacity of both spouses. Life insurance for a non-wage earning
spouse is often recommended for help in paying for household services lost
if that spouse dies.
Should I buy term insurance or cash value life insurance?
Term life insurance pays out in the event of death. Cash value, which is
more costly, has a cash amount you can withdraw before death. Which one is
for you will depend on your circumstances. First answer an insurance
question - how much life insurance should you buy? Then look at the
financial aspect - what type of policy should you buy? The amount of life
insurance you need may be so large that the only way you can afford it is by
buying term insurance, which carries a lower premium than cash value
policies. If your ability (and willingness) to pay life insurance premiums
is such that you can afford the desired amount of life insurance under
either type of policy, you can consider the financial decision - which type
of policy to buy. Important factors affecting the financial decision include
your income tax bracket, whether the need for life insurance is short-term
or long-term (20 years or longer is long-term), and the rate of return on
alternative investments. If you view life insurance as an investment, you'll
want to study rates of returns. If it's protection, then your purchase is a
matter of what you can afford and want to spend.
How does mortgage protection term insurance differ from other types of term
life insurance?
The face amount under mortgage protection term insurance decreases over
time, consistent with the projected annual decreases in the outstanding
balance of a mortgage loan. Mortgage protection policies generally cover a
range of mortgage repayment periods, e.g., 15, 20, 25 or 30 years. Although
the death benefit decreases, the premium is usually level in amount.
Further, the premium payment period often is shorter than the maximum period
of insurance coverage--for example, a 20-year mortgage protection policy
might require that premiums be paid over the first 17 years.
Secure Email