So You Think You Know Life Insurance? (part 2)

On my website at www.lifeinsurancesage.com – there are several different methods described. There’s the basic method where you use a multiple of income – ie. a death benefit equaling 10 times your annual income. There’s also a worksheet and calculators. If you’re doing a full financial plan with a qualified financial adviser, they may assist you in determining the appropriate amount of life insurance. Another easy way to calculate your need is to determine the amount of annual income your survivor (the person(s) who are financially dependent upon you) would need and then solve from there – so for example if you assume that an annual income stream of $50,000 was required, you would purchase $1 million of life insurance – using the following formula – $1 million of life insurance invested at 5% would yield an annual income stream of $50,000 – yes, this is simplistic, however it will give you a good estimate.
Then you’re on to the type of life insurance which is a lengthy discussion. There’s two basic types – term insurance and permanent life insurance. Term Life Insurance is usually for a set period of years and features a guaranteed level premium for that number of years (this is the most common type). View a presentation on term life insurance at http://www.lifeinsurancesage.com/slideshare/. Permanent life insurance is insurance that’s designed to last on a permanent basis anywhere from age 95 to age 120 and encompasses whole life, universal life, equity indexed universal life, variable life and so on – usually these policies have a level premium for the duration of the policy and accumulate some cash value. View a presentation on permanent life insurance at http://www.lifeinsurancesage.com/slideshare/. Your choice should come down to how long you need the coverage – if your need is short term in nature, then a term policy makes the most sense. If you have a permanent need or very long term need than permanent insurance makes sense. Again, be sure you understand why you are buying a particular type of policy and how it works.

Choosing a life insurance company is another issue to consider, most likely at minimum, you’re looking at a ten year commitment ranging to a fifty year or more commitment – so this is a crucial area. A basic first step is to obtain the financial strength ratings for a life insurance company from the rating agencies: A.M. Best, Fitch, Moody’s and Standard & Poor’s – links to the companies and more information can be found on my site at http://www.lifeinsurancesage.com/rating-services/.

One last thing to keep in mind when looking at purchasing term life insurance is that different companies have different criteria, so it pays to work with an adviser who has access to multiple companies especially if you have a complex medical history. As an example, I had a client a couple of years ago who was declined coverage by one major life insurance company and then received preferred rates from another major life insurance company.

And, as with all financial products, it’s important to monitor your policy once you purchase it – especially with permanent life insurance as companies will change their dividend scales/interest rates/earnings and potentially their insurance charges/mortality costs and other expenses. The only way to know for sure on a permanent/cash value policy is to order an in-force illustration – which uses your current policy values and premiums and projects it into the future using current assumptions (dividend, interest, cost of insurance, etc). You should obtain an in-force illustration about every two years.

There’s much more to say about this complex topic and a good next step would be to download the free “Secrets of the Life Insurance Industry Report” on my website at www.lifeinsurancesage.com or test your knowledge by taking the Insurance Literacy Quiz also at www.lifeinsurancesage.com

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