How Much Life Insurance Should You Have, Anyway?

Choosing the right level of life insurance can be complicated. You know you want to leave enough so that your family won't suffer financially from your loss. But that means different things for different people.

You’ll want to factor in a variety of considerations including the number of people you are supporting, your debt and ongoing financial obligations, where you are in your life and your career, and even tax considerations. 

When you're young, and without dependents, life insurance isn’t a pressing needs. But as you get married, have children, buy a home, or start a business, life insurance becomes a more important part of your financial plan.

Who Needs Life Insurance?

Life insurance helps you protect the people you love, as well as being a way to protect your business concerns. Before deciding to buy life insurance, consider the policy cost and potential savings that may be available. Also keep in mind that your insurance needs will likely change as your family, job, health, and financial picture change, so you'll want to build some flexibility into the decision-making process. 

Life Insurance to Protect Your Family

Your income not only pays for day-to-day expenses but also provides a source for future costs such as college education expenses and retirement income. Term life insurance of 20 years or longer can take care of immediate cash needs as well as provide income for your survivor's future needs. Another alternative is cash value life insurance, such as universal life or variable life insurance. The cash value accumulation of these policies can be used to fund future income needs for college or retirement, even if you don't die.

Life Insurance to Cover a Mortgage or Long-Term Debt

For most people, the home is one of the most valuable assets and also the source of the most significant debt. An untimely death may remove a primary source of income used to pay the mortgage. Term insurance can replace the lost income by providing life insurance for the length of the mortgage. If you die before the mortgage is paid off, the term life insurance pays your beneficiary an amount sufficient to pay the outstanding mortgage balance owed.

Life Insurance to Meet Small Business Needs

Small business owners need life insurance to protect their business interest. As a business owner, you need to consider what happens to your business should you die unexpectedly. Life insurance can provide the cash needed to buy a deceased partner's or shareholder's interest from his or her estate. Life insurance can also be used to compensate for the unexpected death of a key employee.

Life Insurance as a Way to Make Charitable Contributions

While not everyone will have a lot of money to give to their favorite causes when they pass away, many people have chosen to take out policies that name charitable organizations as beneficiaries. By setting aside a sum for monthly premiums, even people with modest means can make a big difference to the causes they care about.

There are Two Types of Life Insurance Policies

When you look into life insurance, you’ll find two primary offerings:

Term Policies

Term policies provide life insurance protection for a specific period – it covers a term in time. If you die during the coverage period, your beneficiary receives the policy's death benefit. If you live to the end of the term, the policy terminates, unless it automatically renews for a new period. Term policies are typically available for periods of 1 to 30 years and may, in some cases, will be renewed until you reach age 95. With guaranteed level term insurance, both the premium and the amount of coverage remain level for a specific period.

Permanent Policies, Also Known as Cash-Value Policies

As long as you pay the premiums on time, permanent insurance policies offer protection for your entire life, regardless of your health. As you pay the premiums, a portion of each payment is placed in the cash-value account. During the early years of the policy, the cash-value contribution is a large portion of each premium payment. As you get older, and the true cost of your insurance increases, and the portion of your premium payment devoted to the cash value decreases. The cash value continues to grow--tax-deferred--as long as the policy is in force. You can borrow against the cash value, but unpaid policy loans will reduce the death benefit that your beneficiary will receive. If you surrender the policy before you die (i.e., cancel your coverage), you'll be entitled to receive the cash value, minus any loans and surrender charges.

Different Types of Cash-Value Life Policies

Whole Life Insurance

With whole life insurance policies, you generally make level (equal) premium payments for life. The death benefit and cash value are predetermined and guaranteed (subject to the claims-paying ability and financial strength of the issuing insurance company). Your only action after the purchase of the policy is to pay the fixed premium.

Universal Life Insurance

With universal life insurance policies, you may pay premiums at any time, in any amount (subject to certain limits), as long as the policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be changed, and the cash value will grow at a declared interest rate, which may vary over time.

Indexed Universal Life Insurance

Indeed Universal life insurance policies are a form of universal life insurance, except that the excess interest is credited to cash values. But unlike universal life insurance, the amount of interest credited is tied to the performance of an equity index, such as the S&P 500.

Variable Life Insurance

As with whole life insurance, you pay a level premium for life. However, the death benefit and cash value fluctuate depending on the performance of investments in what are known as subaccounts. This is a pool of investor funds professionally managed to pursue a stated investment objective. You select the sub accounts in which the cash value should be invested.

Variable Universal Life Insurance

This is a combination of universal life insurance and variable life insurance. You may pay premiums at any time, in any amount (subject to limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be changed, and the cash value and death benefit go up or down based on the performance of investments in the subaccounts. With so many types of life insurance available, you're sure to find a policy that meets your needs and your budget.

Review Your Coverage

Once you purchase a life insurance policy, make sure to periodically review your coverage; over time your needs will change. An insurance agent or financial professional can help you with your review. Contact me today to find out more.

Want to read more about life insurance and estate planning? We recommend you read these blogs, Protecting Your Loved Ones with Life Insurance and Q&A with Mark Vergenes.

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Mark A. Vergenes is President of MIRUS Financial Partners, 110 E. King St., Lancaster, PA; 717-509-4521 or [email protected] Investment Advisor Representative offering securities and advisory services offered through Cetera Advisor Networks LLC., member FINRA/SIPC. Cetera is under separate ownership from any other named entity. Neither MIRUS Financial Partners nor Cetera Advisor Networks LLC. give tax or legal advice.