Determining How Much Life Insurance Coverage Needed

When it comes to life insurance needs, a large part of choosing a policy is determining how much money you need. The face value, or the amount that the policy will pay when you die depends on a number of factors. If unsure of how to calculate this amount, these are the determining factors.

Debt

When you die, your debts have to be paid off. This includes any amount that you owe on car loans, a mortgage, credit card debt, and other loans. If you have a $300,000 mortgage, for example, and a $4,000 car loan, then you'll need a policy that has at least $304,000 in order to cover these debts. However, you should also ensure that you have the interest covered as well. Taking out more in order to settle extra interest or any charges that may arise is always wise.

Income Replacement

This is probably the biggest factor when it comes to life insurance. If you're the provider for your children or family and bring in $50,000 a year, then you need a policy that will cover your income in addition to a little extra to protect yourself against inflation. Since the payout of your policy is going to be invested, you should choose an amount that can be taken out each year. There are a number of online insurance estimators that you can use to calculate how much to decide as your income replacement. This amount is generally in the hundreds of thousands of dollars. However, if your dependents will only need your income for a few years, this amount may end up being lower.

General Considerations

Although you can always use online calculators, a general rule of thumb is to add up debt and final expenses, the number of years of annual income, your mortgage, and the cost of sending your kids to college or school. Add all of these expenses together and you'll have an idea of how much you need for your payout. However, while this formula is fairly comprehensive, it doesn't account for your current assets. You may also want to consider how much contributions your spouse or partner has as well.

Once you've added these expenses together, you can subtract your liquid assets from this number. This would include savings, any existing college funds, and other financial assets.

Don't Skimp

Once you have this general number, you may be tempted to get exactly this amount. However, financial planners usually recommend getting slightly more coverage than you think you need. Your income will likely rise over the years and there's also inflation to consider. Expenses are always on the rise and your insurance coverage at present may not be adequate in the future. While you can't anticipate the future entirely, having a cushion will ensure that your family is not left high and dry.

Now that you have an idea of how to estimate your needs, use this information to estimate how much you'll want to get for your life insurance and ensure that you have adequate coverage.

What Type of Life Insurance Do I Need?

Just like a car owner has to have car insurance, it makes sense that a person would have life insurance. This is not necessary for everyone to have but it's a good idea for the head of the household or people who want to protect their families to have. The type of life insurance needed can vary from person to person depending on individual situations. These are the types of life insurance available and what each one entails.

Term Life Insurance

This type of insurance is the simplest and usually most affordable type of insurance that a person can purchase. This is because term life insurance only does one thing- it pays the beneficiaries a fixed amount of money when you die. This type of insurance is set for a certain amount of time so it won't pay if you live past the length of the insurance. However, this is a good option for anyone who wants to be financially protected for only a certain amount of time.

Permanent Life Insurance

There are several types of permanent life insurance but the goal of this coverage is to pay beneficiaries while also being an investment account. This type of policy includes cash value. It's a pool of money that you own and can access. The major differences also include that this type of insurance will not expire and continues until you die or don't pay the premium. The types of permanent life insurance include whole, universal, or variable universal life.

Whole Life Insurance

This policy locks in a premium rate so you pay on a monthly basis to the company. Part of the cost goes into the cash value and grows over time. This means that the longer you own the policy, the more its cash value similar to a savings account. However, this money will be paid to beneficiaries if you die and tends to be more expensive than term insurance.

Universal Life Insurance

This insurance type has a death benefit and a cash value. However, it has an adjustable premium. This means that you can take some of the cash value and use it to pay for the premium. Part of the premium cost will go towards paying the death benefit and the other part will be invested as savings. The idea is that the investment will grow over time and be more profitable in the long run.

Variable Universal Life Insurance

This is the most complicated of policies as they are trying to combine life insurance, a savings account, and a mutual fund into one account. You can decide how your money is invested and there are a variety of choices. You'll get a life insurance payout but also get to have a cash value where you can gain or even lose money. This is probably the worst type to purchase if concerned about losing money in the policy.

These are the types of life insurance available today. Determining your budget and needs for life insurance can help narrow down these choices to find the one that best meets your situation.

What Factors Affect Life Insurance Premiums?

Life insurance is a great way to protect loved ones. However, for people who are shopping for a policy, they may notice that premiums vary considerably. There are several factors which will affect life insurance premiums. To get an idea of what factors are involved, these are the primary ones.

Age

Date of birth is probably the most important factor when it comes to premium costs. An insurance policy taken out at the end of a person's life is going to be a much higher cost than someone who is relatively young taking out a policy. As a person ages, the chances of an insurer having to pay out increases so premiums also go up. This is why it's often a good idea to take out a policy at a younger age when possible.

Gender

Women tend to have longer lifespans then men so their premiums are often less then men's costs. For example, the average life expectancy for women is around 81 years while men are lower at around 76. The five year difference can make a significant different when it comes to total costs. This is why women often will find lower rates then men.

Health History

Some insurance companies may require a medical exam and access to health records before setting up a policy. Having a history of medical problems will generally increase the cost of the policy. Insurers know that chronic diseases such as heart disease and diabetes are going to increase a person's risk of mortality. Insurers also want to know current health conditions. Situations such as weight, cholesterol, and other metrics that could affect future health will all play a role in the cost.

Smoking

This is an area that's often surprising to people but smoking is considered to be an independent risk factor. The health risks associated with smoking include cancer and lung disease. Even if there is a history of smoking, costs may still be higher than a person who has never smoked in his or her life. Insurance companies will want to know about current and past smoking. However, if stopping smoking with a current policy, it may be possible to have a lower premium.

Occupation

The job that a person has may put them at a higher or lower risk of mortality. For example, high risk careers such as loggers, roofers, and pilots can expect to pay a higher amount for insurance. This is because their profession is considered riskier than others. When applying for life insurance, the company will ask about profession. Additionally, a premium may be higher if work exposes you to toxic chemicals or requires performing dangerous duties.

These are a few of the reasons why a premium for life insurance may cost more or less. However, each policy costs can also vary so it's worth getting a few quotes. Since there are also different types of life insurance, always read through the policy specifics. Knowing what's in a policy as well as what factors affect its cost can help each person to make an informed decision.