April 11, 2012

When should you purchase life insurance?  How much, what type and why? These are all questions many people wrestle with when the topic of life insurance comes up. For many people the confusion they feel about life insurance often times will keep them from purchasing it. Without the proper life insurance a family could be left in ruin.  While this may sound very grim it is a harsh reality many people face.

So today we will set out to clarify some of the common questions about life insurance. To not over complicate the issue, we will deal only with Term Life Insurance. Term Life is defined by Rough Notes Online: “A type of life insurance policy that is not whole life or written to cover the whole remainder of the insured’s lifetime, but instead is written to cover only a period of time. Often that period of time is a set number of years such as 1 year, 10 years, 20 years, or 30 years. At other times, the policy is written that expires at a specified age, for example, when the insured turns 65.”

Now to put this in terms that are not so insurance like, Term Life Insurance is like leasing a car rather then buying it. For that reason most people purchase term life when they have children, a spouse, a home and unsecured debt, this often occurs early in adulthood.  Buying this type of life insurance can secure the families future in the event of an untimely death. There are also distinct advantages to buying life insurance at a younger age.

1. Due to your age it is often less expensive.
2. Better overall health at a younger age.
3. Greater selection of choices as a result of that good health.

Now that we have identified that having Term Life Insurance can leave a lasting legacy and secure the secure futures, the question often turns to how much life insurance do I need? The basic formula is really quite simple and can be applied by any individual in any situation.  Take 60% of you annual income and multiply it by the number of years you have before retirement.  This will reveal to you the amount of life insurance you will roughly need to purchase. Below is an example using numbers.

Annual Income = $100,000 x 60% = $60,000 x 35 years until retirement = $2.1 million. These figures are based on a person being the age of 32 with an annual income of $100,000.00. Are you surprised by the above figure? Most people are surprised by the amount of life insurance they really do need. Many times people wait until it is too late; the rates are then too high and preclude them from buying. Or in the worst case scenario an individual dies with no life insurance in place at all, leaving a family reeling and in financial ruin. I was once told the best life insurance to have in place when you die is the life insurance that you have in place when you die, simple words with a strong message.