Life Insurance FAQs

How much life insurance should an individual own?

A: Many advisors have used a “Rule of thumb” to suggest an amount of life insurance equal to 6 to 8 times annual earnings. However, multiple factors should be taken into account when determining the right amount of life insurance for you and your family.

Important factors include:

• Income sources (and amounts) other than salary/earnings
• Whether or not you are married and, if so, what is your spouse’s earning capacity
• The number of individuals who are financially dependent upon 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.)

Calculating the correct amount of life insurance to buy is not as simple as it appears. We recommend contacting us for help determining the right amount of coverage. As independent agents, we can serve as unbiased advisors that will help you avoid buying ill-suited policies, show you appropriate optional coverages for your need and recommend a company that will best serve your interests.

What about purchasing life insurance on a spouse and on children?

A: In certain circumstances, it may be advisable to purchase life insurance on children; generally, however, such purchases should not be made in lieu of purchasing appropriate amounts of life insurance those who provide the economic support for the family.

Should term insurance or cash value life insurance be purchased?

A: This is a difficult question — one whose answer will vary depending on your personal circumstances.

First, recognize that in any life insurance purchasing decision, two questions must be answered:
“How much life insurance should I buy?”
“What type of life insurance policy should I buy?”

The first question should always be resolved first. For example, the amount of life insurance that you need may be so large that the only way you can be afford is through the purchase of term insurance, since term insurance has a lower premium.

If your ability to pay life insurance premiums is such that you can afford the desired amount of life insurance under either type of policy, it is then appropriate to consider the second question — what type of policy to buy. Important factors affecting this decision include your income tax bracket, whether the need for life insurance is short-term or long-term (e.g., 20 years or longer), and the rate of return on alternative investments possessing similar risk.

Also consider the cost-benefit analysis of buying term insurance. If you are in your 20s or 30s with small children, you probably have a very significant need for a high limit of life insurance to care for your family and replace income if you should die. The most economically feasible way to get this protection is usually term insurance. While the policy may end after 20 or 30 years with no payment, you may then be in a position where you have assets and savings to rely on and no minor children who are dependent upon you. At that point in time it may make sense to select a permanent life insurance policy with a lower face value. Some term insurers will even allow a conversion from a term policy to a permanent policy without showing proof of insurability.

Can an existing life insurance policy be used to provide for the repayment of an outstanding mortgage loan?

A: Yes. An existing policy, either term or cash-value life insurance, can be used for many purposes, including paying off an outstanding mortgage loan balance in the event of the insured’s death. Although a lender may offer a mortgage protection term policy to you, the lender rarely requires it.

Credit life insurance is frequently recommended in conjunction with the taking out of an installment loan when purchasing expensive appliances or a new car, or for debt consolidation. Is credit life insurance a good buy?

Credit life insurance is frequently more expensive than traditional term life insurance. Further, if you already own a sufficient amount of life insurance to cover your financial needs, including debt repayment, the purchase of credit life insurance is normally not advisable due to its relatively high cost.