Planning for your financial future can be a daunting task when finances, family obligations, and other considerations are involved. For most people, setting up a life insurance policy can be overwhelming, but the prospect of leaving behind a large sum of cash can sound exciting, too.
So really, what’s the best way to optimize your insurance policy, and what are your options?
Term Life Insurance
Term life insurance coverage exists to replace a person’s income if they pass away. This insurance can aid those family members who may have to cover the costs of living expenses for a few years following the death of a loved one. Sometimes this can mean paying off debts and mortgages.
Depending on a person’s lifestyle and obligations, some individuals require even larger policies to cover other financial needs, like keeping a business alive, cementing a legacy through a charitable gift, or helping to divide a large estate among living family. If you are seeking to purchase a large policy that exceeds the average, there may be some challenges when you try to get your policy underwritten. Insurance carriers may ask: “Why do you need all of this money?”
Financial Justification 101
Life insurance policies are supposed to replace your wealth, not increase it. It’s similar to car insurance, which can only cover up to the value of the car.
Life insurance carriers will ask you to have a financial justification for any policy that is larger than the average. This type of policy will turn out the maximum value of the individual being covered. There is an insurability limit for everyone, which limits the amount of total insurance that be in use or active for any individual, at any given time across all of their life insurance policies.
For example, if a person’s insurability limit was at $2 million, and they already had an in-force policy for $1.5 million, another carrier would not issue a $1 million policy in addition to the existing policy without changes in the current coverage or termination of that existing policy.
Insurance carriers look at your net worth, additional streams of income, current income, and other assets to determine how much coverage they are willing to offer.
General Rule of Thumb
When setting up your life insurance policy, a general rule of thumb is that if you are 40 or younger, you can be covered for up to 25 times your current annual income. Then, every ten years after 40, that multiplier is reduced by five. This means when you are 60-years-old you can get 15 times your annual income in coverage.
Because most people are retired by the time they hit 70, insurance carriers are more hesitant to offer policies to just replace a person’s income, and their underwriters will review requests for large amounts of coverage on a case-by-case basis, mostly based on a person’s net worth and estate tax considerations.
All insurance carriers have different rules regarding the amount of coverage they can offer to non-working parents. This ranges from half of their spouse’s coverage limit all the way up to a matching policy capped at around $3 million.
As you may have guessed, not many people really need to reach the limits of their insurability, and the price of a maxed-out policy is often cost-prohibitive. Instead, ask yourself, “how much life insurance do I need?”
Know What YOU Need
When determining how much life insurance you need, we recommend using a quick process to determine how much actual coverage your lifestyle calls for. First, put enough into your policy to replace your current income for the amount of time it will take for your family to be back on firm financial ground. Second, add additional coverage that your family will need to pay off additional debts, like your mortgage, or a child’s college costs.
At Landau Insurance Brokers, Inc. we help you find the best insurance, suited to your long-term goals and needs. With over 22 years of experience, our state certified agency, based in Los Angeles, California, helps customers find their best long-term insurance plans. We provide life, long-term, and disability insurance coverage options and advice, so you can find the plan that’s just right for you. Let us know how we can help you plan for your future today!