Life Insurance is one of the most misunderstood, yet necessary parts of anyone's insurance portfolio.
The Insurance Information Institute once again steps up with some common sense:
NEW YORK, May 10, 2012
— Term life insurance can provide an essential financial protection for families and its comparatively low premiums make buying enough coverage affordable, according to theInsurance Information Institute
However, many Americans are dissuaded from buying adequate life insurance because they overestimate how much it will cost them. A recent study
by LIMRA and the LIFE Foundation, two industry-supported organizations, surveyed more than 2,000 Americans in January 2012, and found that 20 percent of those who had some life insurance, and 49 percent of the respondents who said they had no life insurance, acknowledged they did not have enough coverage. Most reported they did not obtain more, or any, life insurance because it was “too expensive.”
The survey respondents who admitted they needed more life insurance coverage estimated it would likely cost around $400 a year for a $250,000 term-life insurance policy that would cover a healthy 30-year-old for a term of 20 years. But the real annual premium is closer to $150 in that scenario, according to LIMRA and the LIFE Foundation. Life insurance is also available for purchase by middle-aged and older prospective policyholders.
Term life insurance provides protection for a specific period of time and typically offers the greatest amount of coverage for the lowest initial premium cost. Permanent life insurance, also known as whole life, offers lifelong protection and the ability to accumulate cash value on a tax-deferred basis, but has higher initial premiums than a term policy for the same face amount. The death benefits paid by life insurers are income-tax-free, allowing beneficiaries to replace an income-earner’s income, or a family caregiver’s services.
“Term life insurance can provide beneficiaries with a very cost-effective form of financial protection,” said Michael Barry, vice president, Media Relations, I.I.I.
The face-amount of a life insurance policy—the benefit payable to a policyholder’s beneficiaries should the policyholder die while the policy is in force—should be sufficient to do three things.
1. Replace Income:
Buy enough life insurance so that, when combined with other sources of income, it will replace the income you, as the policyholder, now generate for your beneficiaries, while also financing the expenses your beneficiaries will incur to replace services you provide within the household (e.g., landscaping, tax preparation). Most families who lose their primary income-generator to premature death, and have children under the age of 18, have potential post-death income sources besides life insurance. The most common is Social Security survivors insurance
. The maximum Social Security survivors’ monthly income benefits for a surviving spouse, and two children under age 18, could be about $2,400 per month, which would increase to match inflation.
Stay-at-home parents, and those caring full-time for an adult family member, should also consider purchasing life insurance so that their children, or any adults needing full-time care, have the resources to hire professionals who can perform those tasks.
2. Replace Employer-Provided Benefits: This is income that you receive through your employment but is not part of your wages. It includes things like the employer’s subsidy of your health insurance premium, or the matching contribution to your 401(k) plan, and is often overlooked. The cost of replacing just your health insurance and retirement contributions could be the equivalent of $2,000 per month or more.
3. Cover Death-Related Expenses: These include the funeral costs, taxes and administrative fees associated with “winding up” an estate and passing property to heirs. At a minimum, these expenses can total upwards of $15,000.