When purchasing a life insurance policy, it is important to know how to calculate the proper amount of proceeds that may be needed. If an insured does not have enough coverage, his or her survivor’s financial needs could go unmet. Conversely, if the insured has too much coverage, although the proceeds will cover the survivor’s needs, the excess premium that is paid for the unnecessary extra coverage could have been going towards other needs while the insured was alive.
There are many different ways to calculate what an insured may need regarding life insurance coverage. Therefore, there are some primary questions that an insured must answer in order to get a more precise idea of their needs.
First, they must determine what their ultimate goal is for the coverage. For example, when the insured passes away, will their spouse remain at home taking care of their children? Or will the spouse return to work and place the children in daycare?
Some insureds aim to replace their income, so that their spouse and children do not have to endure financial hardship. Others may want to replace their income and leave an additional amount in order to pay off a mortgage, send children to college, or pay off other large debt balances.
In order to calculate the income that survivors will need, it may be easier to determine expenses on a monthly basis. It is important to include all possible monthly expenses, including items such as your rent or mortgage, food, gas, child care, utilities, and any other expenses. The insured may also want to include an additional monthly amount to be put towards savings, just as if he or she were there setting aside an amount of savings from their income.
From the total monthly expenses, subtract any other sources of income that will remain when the insured dies. For example, a spouse’s income, rental income, Social Security income, and any other source. This will give a total income shortfall.
From this income shortfall, it is then necessary to come up with an annual amount of income. And, from the annual amount of income, the insured must multiply by the number of years it is estimated that income will be needed. This will give a total amount for income replacement.
If the insured has additional lump sum amounts to be paid off, such as student loans or credit cards, these amounts can then be added to the income replacement amount. It is a good idea for the insured to evaluate their life insurance needs every few years in order to be sure that the amount of coverage is still adequate, given any changes in income or debt, as well as any major life changes such as marriage or the birth or adoption of a child.
In business situations, business owners need to make sure that they have enough life insurance coverage to pay any debts of the business. In addition, proceeds should be put in place to keep the business running until either a replacement can be found, or the business can be sold for a price that is either at or close to its fair market value.
How Are Life Insurance Premiums Determined?
Once you have determined the right amount of coverage, it is also important to have a good understanding of how life insurance premiums are determined, as this will have an impact on the amount that you have budgeted for your policy.
There are actually a number of different factors that go into calculating the premium for an individual’s life insurance coverage. And, while many of them have to do with the insured himself or herself, there are also several that have to do with the life insurer and the covering of its expenses.
One of the biggest determinants of premium cost will be the type of policy that you choose. For instance, there are two primary categories of life insurance – term and permanent. With term life insurance, you are purchasing pure death benefit protection, without any other “bells and whistles.” With that in mind, this type of coverage is typically the least expensive – especially for those individuals who are young and in relatively good health.
Permanent life insurance provides both death benefit protection as well as cash value. The cash value component of the policy offers the policy holder a type of savings that grows on a tax deferred basis over time. Provided that the individual owns the policy for a number of years, this cash can grow to a substantial amount – and can be either borrowed or withdrawn for various needs. Because of the cash value feature, however, the premium that is charged for permanent life insurance is typically higher than for a comparable term life policy.
Another factor that will play a large part in the premium that you are charged is the amount of death benefit that you are buying. Certainly, the larger the amount of death benefit, the higher the premium will be. This is why it is usually a good idea to purchase life insurance at a young age, as those who are younger can usually purchase a larger amount of death benefit at a lower premium price.
Both age and health condition of the insured will also have a great deal to do with the premium that is charged. This is because both of these factors have a direct impact on a person’s anticipated life expectancy. Because life insurance companies are taking a direct risk on the people that they insure, they need to “balance” these risks by charging a higher amount of premium for those who have shorter life expectancies than for those who are expected to live longer. (Individuals’ life expectancies are based on life expectancy tables that are used by the insurance companies’ actuaries when pricing life insurance policies).
An individual may also want to add certain other features – or riders – to their life insurance policy as well. These, too, will usually increase the amount of premium that is charged for the coverage.
Other factors such as a person’s smoking status, family health history, occupation and income, frequency of foreign travel, and tendency to participate in dangerous hobbies such as sky diving or scuba diving will also have an impact on what is ultimately charged for the policy.
How to Obtain the Best Life Insurance Policy Premium Rates
As you start your journey of obtaining a life insurance policy, we always first suggest that you shop and compare policies. This should ideally be done through a company that has access to more than just one insurer. Our team at Insure Now 365 can help by giving you access to quotes from all of the major carriers in the life insurance industry- and showing you, through the gathering of information, how our team can provide you the lowers premium rates.
Need more information about the amount of coverage that you need, or how to get the perfect quote for your plan? Our agents are standing by and ready to help give you any advice or put away any concerns you have on starting the life insurance buying process. Our number is 888-229-7522.