Insurance: How Much Bang for Your Buck?
Planning for your
financial future can be a daunting task when finances, obligations, and
considerations are involved. For most people, setting up a life insurance policy
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 exists to replace a person’s income if they pass away. This insurance
can aid those family members who may have to cover the costs 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 divvy-up a large estate among their family and
offset taxes. Life insurance is designed to do this as well, if you are seeking
to have a large policy that exceeds the average, there may be some challenges
when you try to get your policy underwritten. Insurance carriers may ask: “Why
do you need all of this money?”
Financial Justification 101
Life insurance policies are supposed to
replace your wealth, not increase it. Similar to car insurance, which can only
cover up to the value of the car. It’s the same idea.
Insurance carriers will ask you to have a
financial justification for any policy that is larger than the average. This
type of policy will turn out the maximum value of the individual being covered.
There is an insurability limit for everyone, which limits the amount of total
insurance that be in use or active for any individual, at any given time across
all of their life insurance policies.
For example, if a person’s insurability limit
was at $2 million, and they already had an in-force policy for $1.5 million,
another carrier would not issue a $1 million policy in addition to the existing
policy without changes in the current coverage or termination of that existing
Insurance carriers look at your net worth,
additional streams of income, current 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. This means 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. Instead, ask yourself, “how much
life insurance do I need?”
Know What YOU Need
When determining how much life insurance you
need, we recommend using a quick process to determine how much actual coverage
your lifestyle calls for. 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 that your family will
need to pay off additional debts, like your mortgage, or a child’s college
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!