How Long Will Your Life Insurance Last?
According to one survey, nearly half of American households think they need to purchase more life insurance in order to be adequately protected. On average, those households planning to buy more life insurance in the next 12 months already own enough to replace 3.7 years of annual income but need coverage to replace 6.1 years of income.
¹ If you are considering additional insurance, it may help to understand the different types of coverage and how to estimate your family's life insurance needs.
A term life policy provides coverage for a specific amount of time, generally from one to 30 years. Your beneficiaries receive the stated death benefit only if you die during the term of the policy. Term policies cost less for the young and healthy and rise according to age.
Cash-value policies incorporate a tax-deferred savings component that can potentially build a cash balance over time, as well as provide a death benefit to your beneficiaries. Depending on your coverage, you may be able to withdraw or borrow against the cash value of your policy. Bear in mind that loans from a life insurance policy will reduce the policy's death benefit. Premiums are generally more expensive for this type of insurance than for similar levels of term insurance.
A Calculated Decision
Determining how much your beneficiaries would need is not easy, because every family's situation is different. One rule of thumb offered by the American Council of Life Insurers is five to seven times annual earnings. A more complex method takes your own family's assets, income, and expenses into account. Parents might want to add enough coverage to pay for their children's college education. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications. The cost and availability of life insurance depend on such factors as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be wise to make sure that you are insurable by having the policy approved. Few people enjoy planning for a future that may not include them. But knowing that your loved ones could continue to live without financial hardship often makes the effort and investment worthwhile.
1) LIMRA, April 6, 2005
Marc Wright is a Financial Consultant for AXA Advisor LLC. For more information,
