Life Insurance: How Much Bang for Your Buck?
Planning for the future can be a daunting task when financial obligations and considerations are involved. For millions of people, life insurance is an important discussion that can be scary and overwhelming, but the prospect of leaving behind a large sum of cash can sound exciting.
So really, how much bang can you get for your buck?
Term Life Insurance
Term life insurance coverage is designed primarily to replace a person’s income if they pass away unexpectedly. This insurance can help family members bear the burden of living expenses for a few years following the death of a loved one. Sometimes this can mean paying off debts and mortgages.
Depending on lifestyle and obligations, some individuals require even larger policies to cover other financial needs, like keeping a business alive, or cementing a legacy through a charitable gift, or helping to divide up a large estate equally among their family and offset estate taxes. Life insurance is designed to do this as well, if you are looking for larger-than-average face amount on your policy, you may face some challenges when you try to get your policy underwritten. Insurance carrierts may often ask: “Why do you need all of this money?”
It is important to understand that life insurance policies are designed to replace wealth, not increase it. Think of car insurance; a can insurance policy can only cover up to the value of the car. It’s the same idea.
Insurance carriers will require that you have a financial justification for large policies. A life insurance policy can only cover up to the maximum value of the person being covered. There is an insurability limit for everyone, which is the limit to the amount of total insurance that be active on a person at any given time across all of their life insurance policies.
As an example, if a person’s insurability limit was at $2 million, and they already had an inforce policy for $1.5 million, another carrier would not issue a $1 million policy on top of the existing coverage without changes in coverage or surrender of that existing policy.
Insurance carriers look at your income, net worth, additional streams of income, and other assets to determine how much coverage they are willing to offer.
General Rule of Thumb
When setting up your life insurance policy, a general rule of thumb to keep in mind is that if you are 40 or younger, you can be covered for up to 25 times your current annual income. Then, every ten years after 40, that multiplier is reduced by five. So, when you are 60-years-old you can get 15 times your annual income in coverage.
Because most people are retired by the time they hit 70, insurance carriers are more hesitant to offer policies to just replace a person’s income, and their underwriters will review requests for large amounts of coverage on a case-by-case basis, mostly based on a person’s net worth and estate tax considerations.
All insurance carriers have different rules regarding the amount of coverage they can offer to non-working parents. This ranges from half of their spouse’s coverage limit all the way up to a matching policy capped at around $3 million
As you may have guessed, not many people really need to reach the limits of their insurability, and the price of a maxed-out policy is often cost-prohibitive. It may be better to ask yourself, “how much life insurance do I need?”
Know What YOU Need
When determining how much life insurance to buy, we recommend using a 2-step process to determine how much coverage you need. First, put enough into your policy to replace your current income for the amount of time it will take for your family to be back on firm financial ground. Second, add additional coverage for any additional debts your family will need to pay off, like your mortgage, or a child’s college tuition.
At Landau Insurance Brokers, Inc. we help you find the best insurance, suited to your long-term goals and needs. With over 22 years of experience, our state certified agency, based in Los Angeles, California, helps customers find their best long-term insurance plans. We provide life, long-term, and disability insurance coverage options and advice, so you can find the plan that’s just right for you. Let us know how we can help you plan for your future today!