Usually, the first question that arises
when
quoting term life insurance is just
how much is adequate. Let's
take a look at some key ways to approach
this question before you start comparing
plans.
First, a quick look at how term life
insurance is priced. It's
important to understand that this half
of the equation (the other being length..or
term
of coverage) is affected by a few key
criteria.
Age
of purchase for term life
Obviously, you want
to get as much coverage as possible for
a desired price. The age at which
you get term life insurance directly
affects this...and in a significant way.
Term life insurance is very different
from health insurance in that the age
you buy term is locked in. The
premium does not increase as you get
older which is a huge incentive to buy
the coverage earlier. A quick look
at the so-called "cost of waiting" index
illustrates this really quickly.
Rather than wait till you can buy the
correct amount, it makes sense to buy
what you can now and supplement it
later. This way, you can lock in
the lower age rate for as much coverage
as possible and bring your average
amount cost per dollar of coverage down.
There's a real danger in people saying
"I'll wait till I can get more coverage"
not realizing that on average, they will
pay more than if they split up the two
buys (not to mention that they do not
have any coverage during that initial
period of time).
Break
points for amounts of coverage
There are break points of coverage at
which, the cost per dollar of coverage
goes down. For example, you may
pay less (per dollar of coverage) for
$250K of coverage than for $100K or even
$200K. $250K is a standard break
point. You can play around with
the amounts in the quoting engine to see
which amounts work best around your
ideal level of needed coverage.
$500K, $1M, and $2M can also be break
points depending on the carrier.
Greater
amount versus greater term
Another question is should a person buy
more term life coverage (in dollar
value) or buy less for a longer period
of time. This is really a personal
consideration depending on your
situation but you want to keep in mind
the trade-off mentioned above where
additional coverage purchased later will
be more expensive. One
theory of insurance is that it doesn't
always make sense to cover 100% of a
liability. Health insurance
reflects this with 20/80 splits etc.
Once you have determined your needed
amount, perhaps it makes sense to cover
80-90% of this amount for a longer
period of time if you cannot afford to
address the 100% for the full desired
term of life insurance.
Now
that we covered some key factors
affecting cost and how much term life
insurance, let's look at a basic model
for establishing how much term life
coverage is needed. Probably the
easiest and best approach is to figure
out how much income will need to be
replaced during a period of time
critical time. For example, let's
say one member of a family earns $50K
annually and you have two young children
(age 2 and 4). Ideally, you may
want to protect the family by insurance
for $50K x 20 years x inflation amount.
The 20 years times $50K is $1M right
away so that's a baseline. You
have to take inflation into account over
longer periods of time so you really
should have more protection than this
baseline over a 20 year period.
Luckily, term life insurance is pretty
inexpensive, especially if purchased at
a younger age. You can use our
Term Life Planner to quickly and easily
run this calculation with inflation
included.
Outside of the replaced income strategy
to estimated needed term life insurance
coverage, the other main approach
involves taking care of a fixed
financial responsibility. This
could involve paying off a primary
residence mortgage or buying out a
business partner. Essentially,
look at your liabilities...the companies
or people that you owe money to.
Add all this up and add a cushion.
This usually works well when missing
income is not really the issue.
This approach essentially insures that
loved ones will no longer have the
ongoing financial burdens or
liabilities.
A
combination of replaced income and
liabilities is a well-balanced approach
when considering how much term life
insurance is enough. You can run
your
term life quote instantly to
compare different amounts and
price-points based on the information
above.
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