Life Insurance FAQ
Q: How much life insurance should an individual own?
A: Rough "rules of thumb" suggest an amount of life insurance equal to 6 to 8 times your annual earnings. However, many factors should be taken into account in determining a more precise estimate of the amount of life insurance needed. Important 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, and
- Whether any special life insurance needs exist (e.g., mortgage repayment, education fund, estate planning need), etc.
It is recommended that a person's insurance advisor be contacted for a precise calculation of how much life insurance is needed.
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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; however, such purchases should not be made in lieu of purchasing appropriate amounts of life insurance on the family breadwinner(s).
It is most important that the income earning capacity of the primary earner 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 dualearning 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.
Contact Gateway Insurance’s life expert, Clara Oakes to find out how much life insurance is needed to fit your needs.
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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. First, at least two basic questions:
- "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 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.
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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 is often 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, 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.
Q: Is credit life insurance a good buy?
A: 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.
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