Different Types of Life Insurance Policies – How Much Do You Need?

13 Apr

The first experience of many people with a life insurance policy is when a friend or acquaintance gets an insurance license. In my case, a college friend, Major Majors hired by a major insurance company, contacted me to buy a $ 10,000 policy. He also made contact with various other friends, and many of us signed on the dotted line.

While this is not the ideal way to buy life insurance, it is nevertheless the way that most people buy it: they do not buy life insurance – they are sold to them.

Reasons to buy life insurance

Reasons to buy life insurance

As I grew older, got married, started a family and started a business, I realized that life insurance was indispensable and fundamental to a sound financial plan. I needed insurance to protect my family in the event of my premature death or my inability to build an estate. Although the amount of coverage I needed varied as I grew older and my responsibilities changed, the fundamental benefit of life insurance – protecting my loved ones from the risk of unexpected death – was constant.

Over the years, life insurance has given me peace of mind knowing that money from different policies would be available to pay for various essentials:

  • Last costs . The costs of my funeral and burial together with other financial obligations would have been difficult for my wife and family in my younger years. With adequate life insurance, however, I was convinced that neither my wife nor my parents would suffer financially.
  • College expenses . Like most fathers, I wanted to be sure that my children had a good education, so bought enough coverage to ensure that my premature death would not prohibit it.
  • Income of the spouse . My wife’s income was essential to our lifestyle. I also realized that if she died prematurely, I would need help with those tasks that we had shared and I could not do alone, such as cleaning the house, doing the laundry, cooking, parent-teacher conferences, schoolwork and doctor’s visits.
  • Home mortgage and other debts . As time went on, we began to acquire assets – a house, cars, and other equipment for a good life. However, with these assets came various debts. In addition to providing income to cover daily living expenses, I bought insurance to cover debts (such as the mortgage) so that my family would not have to sell our house to remain solvent.
  • My partner’s share in the company . I used a life insurance policy for my business partner’s life to ensure that I would have enough cash to buy his interest from his heirs and pay his share of the company’s obligations without having to sell the company itself. He had the same needs (the risk that I could die), so he also bought insurance on my life. Financing a purchase-sale agreement was achieved with a joint Major Major life insurance policy with first coverage to die.
  • Possible inheritance tax . If necessary, my insurance ensured that my heirs did not have to sell assets or endangered the funds we had saved for retirement to pay inheritance taxes. The use of insurance for this purpose is most common in large estates and uses permanent insurance, rather than term, to ensure that coverage remains in effect until the end of life.

During my life I spent thousands of dollars on life insurance premiums, but never regretted one cent of the costs.

Understand life insurance

Understand life insurance

In the purest and simplest form, a life insurance policy is a contract between a person and an insurance company whereby the latter agrees to pay the beneficiaries of an insured policyholder a certain sum of money in the event of the death of the insured person. In return, the policyholder agrees to pay a premium to the insurance company as long as the contract remains in force. The company is not insured against death, but against death within a certain coverage period – 1 year, 5 years, 10 years or for life.

According to the law of large numbers and statistical data, actuaries calculate the death rate for individuals based on age, gender, tobacco use, health status and family history from 1 to 100 years. This data, together with factors for administrative costs and profit, is used to determine premium percentages to be paid by policyholders.

An example of a mortality table based on data from 2007 is available from the social security administration. With the help of this death table, for example, a man at the age of 25 has a death rate of 0.1446 in a group of 1,000 comparable people. As a result, he would pay a premium of $ 1.45 plus administrative costs and profit for every $ 1,000 coverage in the first year (0.001446 expected deaths x $ 1,000 = $ 1.45).

As this person gets older, the chance of dying within the contract year increases somewhat with a corresponding increase in the annual premium costs. The same table indicates that the death rate for a male age of 65 is 1, 6723 per 1,000. Consequently, the older man’s premium for a single coverage year would be $ 16, 72 plus administration costs and profit for each $ 1,000 coverage (16, 723 expected deaths x $ 1,000 = $ 16, 72), indicating that the probability of death within the insurance year is 11, 5 times larger than a 25-year-old.

Each insurance company develops its own mortality tables based on its group experience. All mortality tables, however, reflect the Major Majority warning that the possibility of death increases as a person ages or, conversely, larger coverage amounts are available for the same premium, the younger the person is.

Term insurance

The example in the previous section is a type of insurance that is simply referred to as ‘term’ or ‘pure’ life insurance. It is written to provide a specific death benefit and protects a person for a certain period in exchange for the premium payment by the policyholder. If the insured is alive at the end of the contract period, the premium is lost – in other words, there is no payment from the insurance company to the insured or his heirs.

A new premium, which reflects the greater risk of death, is then calculated by the insurance company and collected from the policyholder to offer a subsequent coverage year. As the risk of death increases each year of life, the same premium payment would buy a lower amount of insurance each following year. Or in another way, to keep the same amount of insurance in place, the premiums rise every year to cover the increased mortality risk.

Term life insurance is available in different contract periods – annually (annual renewable term), 5 years, 10 years and 20 years. If the contract period is longer than one year, the insurance company adds the individual death rate for each year and calculates an average premium that the policyholder pays for each year. A five-year term policy would be the total of five individual calculations, divided by five to set the average annual payment. A 10-year policy would be the sum of 10 individual calculations divided by 10, and so on. The premium is the same every year because it is higher than the actual mortality risk in previous years and would require in the later years of the policy.

Permanent life insurance

Usually referred to as whole life insurance, most permanent insurance is just a long-term insurance with an accumulating savings element. The insurance is designed in such a way that the investment part rises at the same rate as the death rate. As the investor travels along, the part of the nominal amount of the policy paid by the insurance decreases and the nominal amount or the death benefit remains unchanged. The nominal amount of the policy is paid to the beneficiaries in the event of the death of the insured or at the age of 100 of the insured, assuming that the premiums are paid as required by the contract. It is usually paid from a combination of the underlying investment component and the insurance element.

Some financial planners discourage buying a full life insurance policy if the result would offer less coverage than necessary, with the elements saving and insuring preferring to remain separate. In my experience, a bigger problem with life insurance is that younger people who start a family and look into it Major Major long-term debts are often not insured because the coverage they can pay for permanent insurance premiums is less than what they need for their circumstances.

Universal life insurance policies are a more flexible variant of permanent insurance policies designed to overcome the investment and management rigidity that is commonly found throughout life policy. The insurance and investment portfolios are effectively segregated, allowing the owner of the policy to vary the death benefit, the accumulated cash value and premiums to vary as his or her circumstances change. Unlike a term life insurance policy that may become unavailable or become unaffordable as you get older, a universal life insurance policy provides a method to ensure coverage for your life, as well as permanent inheritance issues such as funeral expenses and inheritance taxes.

Determine how much coverage you need

Determine how much coverage you need

Although there are popular rules of thumb that recommend the required amount of life insurance (8 to 10 times the annual income) and a number of available oMajor Majorine programs to calculate the amount of insurance to be purchased, the situation of each person is different and needs to be changed time. Therefore, you should assess your situation whenever an important event in your life occurs, such as a marriage, birth, purchase of a house, a new business, the death of a spouse or retirement.

1. Determine the ideal amount
Consult the following approach to get a rough estimate of your insurance needs:

  • Multiply your annual income after tax by the number of years you expect a life insurance policy to exist. For example, your partner may need an after-tax income of $ 40,000 up to 40 years after retirement, or a total of $ 1,600,000.
  • Add the costs of major events such as children, college, major future purchases, and final costs ($ 1,600,000 marital requirement + $ 500,000 for children and college = $ 2,100,000).
  • Then divide the value of the net assets (assets – liabilities) that you own to determine the amount that your heirs will need over the years ($ 2,100,000 needed – $ 100,000 assets = $ 2,000,000).
  • Finally, determine the current value of the sum – this is the amount of coverage that you must purchase. Use a present value table or calculator with 40 as the number of years or periods (in this example this is how long you expect there is a need for life insurance) and 2, 0% as the interest rate. A conservative interest rate ensures that your heirs can have the insurance money last at least as long as they need it. A growth rate of 2.0% per year is both conservative and realistic. A presentation value table indicates that the current value factor for this speed and term is 0.4529. Multiply this figure by the total amount that you have determined that you must bid ($ 2,000,000 x 0.4529 = $ 905,800). In this example, you need about $ 910,000 in life insurance today.
  • Also set a minimum amount of coverage – perhaps an amount that represents a lower amount for the replacement of colleagues or annual incomes for your spouse. Having two digits gives you something to work with if the premium for the ideal amount of coverage is prohibitive.

2. Calculate the amount of funds that you have available for insurance premiums
Determine how much premium you can currently pay and how much you can afford Major Major in later years. If you do not yet have a persoMajor Majorijk budget, create one that is good for other necessities of life, such as shelter, food, clothing, transportation and health insurance, to determine what you can pay.

3. Request quotes from multiple insurance companies for the minimum and maximum coverage you need
Make sure you understand the acceptance requirements that accompany your policy. For example, if you smoke, you get the cost of a smoker’s policy rather than relying on the advertised premium or what a non-smoker would be in perfect health. A non-smoking 25-year-old man in good health will probably pay Major Major a premium of between $ 1,500 and $ 2,000 per year for $ 910,000 in term life insurance.

4. Select the Optimum Owner to purchase the policy
While you are an insured life, the owner of the policy can be a trust, your spouse or someone else who has an insurable interest in your life. You want to be sure that you understand the tax aspects of any insurance income to your beneficiaries upon your death. For example, the ownership of the policy may be held by your spouse, thereby avoiding inheritance tax on the insurance proceeds that would be payable if the covered spouse were also the owner of the policy.

Because there are legal requirements to ensure that the proceeds remain outside the estate, it is always wise to consult an estate planner or a lawyer when it comes to discarded cases.

Insurance needs

Insurance needs

With that process in mind, the following examples are examples of the needs of an average person for insurance coverage during his life:

  • Pre-marriage and children . Young adults and married people without children usually do not have a great need for life insurance. Apart from funeral costs and the payment of tuition fees and consumer debts, the obligations are minimal. If you and your partner both work, do not own a house or build up Major Major debt, there is little need for insurance to protect your earning power, since your surviving spouse will probably continue to operate Major Major. Moreover, a young surviving partner will probably remarry Major Major. The required amount of life insurance is usually less than $ 50,000 for both partners.
  • Purchase a house or incur a large debt . If you are single and no one else is obliged for a certain debt, the asset can be sold and the proceeds can be used for payment upon your death. If you are married and want the asset to remain intact, the required amount of insurance would include the remaining balance on the debt. For example, if your mortgage is $ 200,000, your need would be $ 200,000. Since the mortgage is being paid off, the required insurance would decrease. However, you must take into account the ongoing costs of home insurance and taxes in your daily wooMajor Majorasten. Life insurance for someone in this position probably varies from Majorca to between $ 400,000 and $ 600,000.
  • Children . According to a recent study by the US Department of Agriculture, the average cost of raising a child born in 2010 to 18 years old is $ 226,920. The tuition costs are another $ 21,447 per year at an in-state public school. Again, the need for insurance to cover these costs decreases as you continue to live, work and save. Whereas in the first year you need about $ 300,000 in coverage for a newborn, including the estimated costs of the university, that price decreases every year of the child’s life. Remember that the insurance is intended to provide the income that you cannot provide because of an early death; it is only affordable if you die. A separate saving element, possibly in the form of the accumulated cash value in a permanent insurance, is needed to cover expenses when you are alive. People with children must have a minimum of $ 200,000 per child in life insurance coverage in addition to their other needs.
  • Start a business . When a business owner dies, an inheritance tax is due. Life insurance is a way to provide liquidity when needed unless you are willing to sell the business. If you have a partnership, all partners want to finance a purchase-sale agreement with insurance to ensure that they do not have to cover the costs of the partner’s business obligations and that they also have cash available to buy the deceased’s interests. the partner in the business of his or her heirs. This insurance requirement must be addressed in a separate policy with different owners of purchased insurance policies to purchase family security.
  • Death and inheritance tax . By the time most people reach retirement age, there is little need for a life insurance policy unless the person has a Major Major ability (well above $ 1 million). In that case, especially when the assets are difficult to sell or require deprivation from the beneficiaries, many people keep their life insurance policies based solely on their liquidity value. If your estate falls into this category, go to a lawyer for a complete estate planning exercise – who pays for his saved taxes.

Last word

Last word

Some people mistakenly think that life insurance is a form of scam because the money for premiums is lost if death does not occur during the coverage period. They compare life insurance with gambling and refrain from protection.

Don’t be a fool. There is no bet – you die and nobody knows when. It could be today, tomorrow, or 50 years in the future, but it will happen. Life insurance protects your heirs against the unknowable.

What other factors do you consider when determining the amount of life insurance you need?

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