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Why life insurance?
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The Textbook Definition
- Life insurance is concerned with the economic value of a human life. An individual’s human life value is derived from earning capacity and the financial dependence of other lives on that earning capacity. A person’s human life value is the present value of all estimated future earnings. Life insurance allows the income earner to leave the family in the same economic position that they would have enjoyed had he or she lived.
The main reason we choose life insurance
It’s the biggest gift of love that one can give in order to make sure their loved ones are provided for upon one’s death. My main goal as an insurance agent is to make sure I help people plan for a sound financial future while protecting themselves and their loved ones for the present, through insurance.
How much life insurance?
Today’s economic environment is much different compared to the late 90’s and earlier. The rule of thumb then was to have at least 10 times annual salary. For example, if you make $50,000 a year then you should have $50,000 X 10 = $500,000. This was under the assumption that one would invest the $500,000 into the stock market or better yet a variable annuity, get a 10% rate of return, and regain the $50,000 in lost income each year. It was typical to see the stock market and mutual funds get that type of return before the dot com bubble burst.
Today, a passbook savings account pay’s less than 2% and the stock market has been flat over the last few years. An individual needs to revisit their life insurance to make sure their loved ones would still be taken care of. If we take the assumption that an individual earns the same salary and can get a 6% fixed annuity in the market then the new rule of thumb is to have almost 17 times annual salary. For example, if you make $50,000 a year then you should have $50,000 x 17 = $850,000. A 6% annuity x $850,000 = $51,000 a year.
Unfortunately, most people are underinsured. They think that their group life insurance at work is adequate. However, nothing can be further from the truth. Employers who offer life insurance benefits typically pay for coverage equivalent to one to two times the employee’s salary. That works for a single person just starting out with no dependents. If you have a family in your earning years it is a different story. Another issue to evaluate is your job. If you get laid off or leave your job your group life plan may not be transferable.
Get an annual review each year
Just like we see the dentist every six months, or review our home and auto insurance each year, it is always a good idea to revisit your life insurance. Not only can today’s economy impact determine how much insurance we may need, but tax issues may be an issue as well. Other life changing events are as follows:
- You start a new job
- You have a new child or grandchild
- You opened up a business of your own
- You purchased a home
- You are planning for a child’s college tuition
- You or your spouse’s health has diminished
- You are concerned about retirement income
- You have a large estate and are worried about taxes
Term vs. Permanent Insurance
It depends on your financial goals, budget, and preference when deciding between term and permanent insurance. Each person’s situation is different. Not one is necessarily better than the other. A lot of folks like a combination of both. Meaning a policy can be permanent mixed with term. The difference between term and permanent insurance is that term insurance can last from 5, 10, 15, 20, or 30 years and doesn’t build cash value. Permanent insurance is meant to last for a person’s life until death and builds cash value. Contact us at Melliand Insurance to help custom a policy for your specific needs.