Life Insurance
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Purpose of Life Insurance
The most basic reason to purchase life insurance is to provide for those you leave behind. In most cases your income will cease in the event of your death while your family’s obligations will continue after your passing.
Most people solve this issue by purchasing life insurance that will adequately replace their income after their death. The plan is to provide a lump sum that can be invested for the purpose of drawing the interest in an amount equal to the deceased persons income. This is usually in the form of either a term policy (coverage for a specified number of years) or a whole life policy that covers you until your passing (your whole life). These policies usually have a minimum of 100,000 up to 1,000,000 or more of coverage. We will discuss the differences between term and whole life policies on this link.
Some folks are retired or close to retirement age and do not have a need to replace income any longer. They can purchase a final expense policy that pays for any expenses their family may incur after their death. These are usually affordable plans in the $10,000- $15,000 range that will cover the burial expenses and perhaps a monument as well. You may purchase a policy for as little as $2,500 up to $35,000 depending on the company you choose.
The other reason to buy life insurance is to create an estate or legacy in your name after your passing. This is how individuals create generational wealth and avoid taxes in providing for their families upon their death. Since life insurance proceeds pass on to the beneficiary tax free a life insurance policy can be an excellent way to provide for your children or grandchildren.
As we often say to our clients, there are only a couple of reasons to purchase life insurance and neither one of them are “because the agent wants to sell you a policy”. Hoover Insurance Services practices need based selling only.
Although there are different names attached to different policies there are only two types of life insurance policies, Term or Whole Life.
Term Life Insurance covers you for a specific term, either a certain number of years (i.e. 10,20,30) or until a certain age. If you pass away during the term your beneficiary will receive the proceeds. If you outlive the term the insurance terminates without any payout.
Your premiums usually will not change during the term of the policy, this is called a level term policy. A renewable term policy will adjust the premium each time you renew the policy, usually every 5 years or each time you reach a certain age. There are also decreasing term policies that are usually used to cover a mortgage loan or other debt.
Whole Life Insurance covers you for your whole life, until you pass away or until you reach a certain age usually age 121. You will pay a level premium for a specified number of years or until you reach a certain age. Your policy will build cash value at a rate set by the insurance company each year that it is in effect. You will be able to access the cash value through policy loans if needed. When you pass away your beneficiary will receive the proceeds of the policy less any outstanding loans. If you live to age 121 the policy will mature and the proceeds of the policy less any outstanding loans will be paid to you.
Universal Life Insurance is a form of whole life insurance that builds cash value based on a market index rate at the time of purchase. The higher the market index rate, the lower your premiums will be and vice versa. The issue with this model is if the market index rate drops and/or stays below the initial market index rate the policy will either require a premium increase or will use any cash value to make up the premium needed to keep the policy in force. This can result in large premium increases or lapse of the policy when the cash value is exhausted.
The type of policy you need can best be determined with the help of a licensed insurance professional. Be sure you speak to a broker that can offer more than one insurance carrier in order for you to compare coverage.
Types of Life Insurance
Term Life
Whole Life
How Much Life Insurance Do I Need
All Life Insurance policies that we sell are need based policies. You can determine your individual amount based on a couple of formulas. If you are needing to provide an income for your family upon your untimely death you would simply multiply your annual income by 15 to determine the amount of coverage you need. Example you are currently earning 100,000 per year, 100,000 X 15 years = 1,500,000. This will provide your family an annual income of 90,000 (1,500,000 X 6%) without drawing down the principal. (best case scenario) This allows your family to continue the same lifestyle after your death that you provided prior to passing. Even if your family chose not to invest the proceeds of your life insurance policy, they would be able to continue the same lifestyle for 15 years before they exhausted the money. (worst case scenario)
The other formula is to add up all your current obligations (bills) and purchase a policy equal to that amount. This would allow your family to pay off all obligations upon your death and live debt free. This would enable them to live on only one income.
The last formula is similar to the above example and best suited for those folks who are retired or approaching retirement. Because these folks will have most of their debt paid off (mortgage, college expenses, etc.), they would simply add up the costs of a funeral, burial, marker, and any lingering bills including health care expenses and purchase a Final Expense policy equal to that amount. Depending upon their preference of burial or cremation these policies are usually sold in the amount of $2,500-$35,000. Hoover Insurance Services would be happy to meet with you and assist in determining how much coverage you need or if you need coverage at all.