Life Insurance FAQs
Q: Why should I have Life Insurance?
A: Unfortunately, your loved ones die – some sooner than later. The important point is to do what’s right for those you love. A person gets life insurance to make sure that there is enough money available to maintain the financial life and stability for those who will still be living and have a future. It’s a good decision because you’re looking out for your spouse and/or your children.
Q: How much life insurance should an individual own?
A: You should have enough coverage to replace the income that you would have earned had you been alive to earn it. A rough “rules of thumb” suggest an amount of life insurance equal to 6 to 8 times annual earnings. However, many factors should be taken into account in determining a more precise estimate of the amount of life insurance needed.
Imporant factors include:
- Income sources (and amounts) other than salary/earnings
- Whether or not the individual is married and, if so, what is the spouse’s earning capacity
- The number of individuals who are financially dependent on the insured
- The amount of death benefits payable from Social Security and from an employer sponsored life insurance plan
- Whether any special life insurance needs exist (e.g., mortgage repayment, education fund, estate planning need), etc.
Q: What if I smoke cigarettes or use tobacco – does that affect my insurance rates?
A: Yes. It will but you still can get competitive rates. Some companies charge less for tobacco use than others. Also, if you get a life insurance policy that includes a rate for tobacco use, it’s possible to lower it in future years if you quit tobacco for a number of years and remain healthy.
Q: What about purchasing life insurance on a spouse and on children?
A: In certain circumstances, it may be advisable to purchase life insurance on children; generally, however, such purchases should not be made in lieu of purchasing appropriate amounts of life insurance on the family breadwinner(s). It is of utmost importance that the income earning capacity of the primary breadwinner be fully protected, if possible, through the purchase of the required amount of life insurance before contemplating the purchase of life insurance on children or on a non-wage earning spouse. In a dual-earning household, it is important to protect the income earning capacity of both spouses. Life insurance on a non-wage earning spouse is often recommended for the purpose of paying for household services lost at this individual’s death.
Q: Should term insurance or cash value life insurance be purchased?
A: Although a difficult question–one whose answer will vary depending on circumstances–several principles should be followed in addressing this issue.
It must first be recognized that in any life insurance purchasing decision, there are at least two basic questions that must be answered:
- “How much life insurance should I buy?” and
- “What type of life insurance policy should I buy?”
The question contained in (1) involves an “insurance” decision and the question contained in (2) requires a “financial” decision.
The “insurance” question should always be resolved first. For example, the amount of life insurance that you need may be so large that the only way in which this needed amount of insurance can be afforded is through the purchase of term insurance with its lower premium.
If your ability (and willingness) to pay life insurance premiums is such that you can afford the desired amount of life insurance under either type of policy, it is then appropriate to consider the “financial” decision–which type of policy to buy. Important factors affecting the “financial” decision include your income tax bracket, whether the need for life insurance is short-term or long-term (e.g., 20 years or longer), and the rate of return on alternative investments possessing similar risk.
Q: How does mortgage protection term insurance differ from other types of term-life insurance?
A: The face amount under mortgage protection term insurance decreases over time, consistent with the projected annual decreases in the outstanding balance of a mortgage loan. Mortgage protection policies are generally available to cover a range of mortgage repayment periods, e.g., 15, 20, 25 or 30 years. Although the face amount decreases over time, the premium is usually level in amount. Further, the premium payment period often is shorter than the maximum period of insurance coverage–for example, a 20-year mortgage protection policy might require that level premiums be paid over the first 17 years.
Q: Can an existing life insurance policy be used to provide for the repayment of an outstanding mortgage loan?
A: Yes; the purchase of a new mortgage protection term insurance policy is usually not required by the lender. An existing policy, either term or cash-value life insurance, can be used for many purposes, including paying off an outstanding mortgage loan balance in the event of the insured’s death. Credit life insurance is frequently recommended in conjunction with the taking out of an installment loan when purchasing expensive appliances or a new car, or for debt consolidation. Is credit life insurance a good buy?
Credit life insurance is frequently more expensive than traditional term life insurance. Further, if you already own a sufficient amount of life insurance to cover your financial needs, including debt repayment, the purchase of credit life insurance is normally not advisable due to its relatively high cost.
Q: Does my occupation or the type of work I do have a bearing on my eligibility?
A: Yes. If your occupation places you at great risk of injury (parachute tester, for example) or illness (say, an asbestos remover) you can expect to pay more — or even be ineligible — for disability insurance.
A key clause in a disability policy describes what occupations you may be able to perform. For example, a policy may specify that you are considered disabled when you cannot perform your normal occupation. Suppose you are a dentist and you become injured so that you can no longer work on teeth. According to the above definition, you are disabled, and are entitled to receive disability payments. A policy with this occupational description offers strong protection for you. However, assuming you can find an insurance company willing to write such a policy, it will probably be more expensive ? require higher premiums — than one of the other possible descriptions.
On the other hand, a policy may state that you are disabled when you cannot engage in any similar occupation. In the above example, a dentist might not be considered disabled if he or she is still able to teach dental students. Similarly while a back problem may prevent the urologic surgeon from doing surgery in his exact field, he might be able to do other forms of surgery, and he certainly could conduct an office practice. This offers less protection, but such a policy would normally have lower premiums than the first type of policy.
A policy that describes you as being disabled when you cannot perform any occupation offers even less protection (and is more readily available and at a lower cost). In fact the test of disability for purposes of Social Security Disability is the inability to do any kind of job that exists in sufficient numbers anywhere in the United States. In this case, if the dentist cannot practice dentistry or teach dentistry, he or she might still be able to do some other type of work, such as serve as a retail cashier or toll collector or parking lot gate operator ? and thus he would not be considered disabled.
Many disability insurance policies have provisions that start with a more protective description for the first few months or years, and then change to a less protective description after the initial period. For example, a trial lawyer might initially be considered disabled if she could no longer do courtroom trial work (even though she could do office work in a law office) but after a year or two she might be considered disabled only if she could not do legal work, and after several more years, might be considered disabled if she could no longer work even in a clerical or retail job.
