How Much Life Insurance Coverage Is Necessary For Income Replacement?

Income replacement is one of the biggest things to consider when determining the amount of coverage needed in a life insurance policy. Financial professionals offer several different formulas to calculate income replacement. One of the simplest formulas takes your annual income and subtracts your personal expenses. For example, let’s say you bring home $50,000 per year. Some of that money will be spent on your personal needs (not family needs). If you are no longer alive, then you are no longer spending money on personal needs. That’s why personal expenses are subtracted from annual income. A common assumption is that 25% of your annual income is devoted to personal expenses. Financial professionals recommend a minimum of 5 years income replacement.

There are some decent life insurance calculators available, but one assumption they all make is that your income is the only income that needs replacement. Grieving affects many things, including job performance. Some surviving spouses may require a long time to grieve, so their job performance may be affected long term. Grief may even cause someone to lose a job. I don’t claim to know the statistics on grieving and job performance, but one thing makes intuitive sense: jobs that require a great deal of creativity are most affected by grieving. On the other hand, jobs that require repetitive manual labor are probably the least affected.

Job performance may also be affected if the surviving spouse has young children. Time may be needed away from work in order for a parent to provide emotional support for grieving children. In conclusion, it’s good to consider the income of both spouses for life insurance coverage even though only one spouse is being insured with the policy. If you have any questions, don’t hesitate to send me a message.

Will I Save Money If I Backdate My Life Insurance Policy

One of the biggest rating factors for life insurance is your age. Most people probably don’t realize they can turn back time and be rated a year younger. Before people get too excited, I want to caution there are some restrictions and reasons for not doing this.

  • Every insurance company has its own rules for backdating. Some allow a full 6 months, others allow a much shorter time, and some don’t allow any backdating. Backdating a policy several months might not be ideal for many clients because an agent has to collect all backdated premiums up front.
  • Backdating might not be advantageous for young people. The difference in premium between someone who is 20 years old and someone who is 21 years old is negligible. On the other hand, the difference in premium between someone who is 79 and someone who is 80 is substantial.
  • Backdating is only for people who are fairly certain they will keep a policy for life. I would not recommend it for someone with a history of life insurance cancelling because of nonpayment. If you end up keeping a policy for only a few months, then backdating is a waste of money.
  • You must deal with an agent’s willingness to backdate. The issue of backdating rarely comes up for agents, so they might be out of practice and uncomfortable with the idea. Agents are a little paranoid about making mistakes, and agents know they are more likely to make mistakes with uncommon issues.

Life Insurance Options If You Had Cancer

What are your options if you had cancer in the past and you want life insurance? The type of cancer matters. Insurance companies are okay with basal cell skin cancer. They are also okay when the affected organ is removed. For instance, if you have a radical mastectomy after having breast cancer, the insurance company will act as if the cancer never occurred. The length of your remission plays a big role. If you’ve been in remission for two or more years, you should be able to get simplified-issue-whole-life. Keep in mind that medications may impact your approval. Some companies are friendly toward cancer maintenance drugs. Other companies seem to imply that you still have cancer if you are using cancer drugs (even if you’ve been in remission for a long time).

Many people who had cancer in the past head straight for guaranteed issue products without considering alternatives. It’s easy to understand why. Guaranteed issue products don’t ask medical questions, which many people like. People with a history of cancer fear being rejected by insurance companies. Emotions are not the only thing at stake with rejection; some companies specifically ask if a denial of coverage occurred in the past (insurance companies may deny coverage if another company denied coverage). Therefore, if you are not going with a guaranteed issue product, make sure your agent is trying to place you in a policy that has a high probability of approval. That way you won’t have a denial on your record (insurance companies can track denials in a database called MIB). Despite the positives of guaranteed issue, it shouldn’t be your first choice. Guaranteed issue comes with a two year waiting period for full coverage. Immediate full coverage should always be your goal. If you have any questions, don’t hesitate to contact us.

The Problem with Guaranteed Issue Life Insurance

Guaranteed issue life insurance is also known as guaranteed acceptance life insurance. This type of plan doesn’t provide full coverage until a two year waiting period expires. Many guaranteed issue plans are sold directly to consumers without an agent. Insurance companies that sell direct to consumers are financially incentivized to sell as many of these policies as possible. Insurance agents, on the other hand, have a disincentive to sell these policies. Agents take a drastic pay cut on guaranteed issue plans. This means that agents fight to get their clients a better policy because the commission is better. Agents should do the right thing because of ethics, but its nice to know that a financial incentive also causes them to do good.

People assume that serious health events such as cancer and heart attacks will disqualify them from everything other than guaranteed issue. An agent may be able to challenge that assumption, but if people buy direct from the insurance company without talking to an agent, that assumption will go unchallenged. In reality, that assumption is often false. Many serious health events become irrelevant for simplified issue whole life once two years has passed.

Life Insurance for Dangerous Jobs

Do you have a dangerous job and need life insurance? Most types of life insurance ask at least one underwriting question about your occupation. You can either do things the hard way, finding a company willing to accept your particular occupation, or you can simply go with a type of policy that doesn’t ask occupation questions. Is it fair if the insurance company doesn’t ask about a risky job and you have one? Yes, the insurance companies are very much aware of the risk factors out there. If they don’t ask a question, it’s because they don’t care about that risk or they already beefed up their premium to account for a certain percentage of people with dangerous jobs. As far as I know, all term life policies want to know what job you have (guaranteed issue term life is probably the one exception). Whole life policies also ask about occupation, except for simplified issue whole life and guaranteed issue whole life. Guaranteed issue products are not the best option because that product is designed for the most extreme risk, such as someone who was just diagnosed with cancer or terminal illness. You’ll end up with coverage limitations (2 year waiting period) and higher premiums if you go with guaranteed issue. Therefore, the best thing to use for dangerous jobs is a simplified issue whole life policy. With simplified-issue, there are no occupation questions, but there are questions to eliminate high risk medical problems. This allows you to have a policy with lower premiums and no coverage limitations.