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.

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.

Life Insurance Misconceptions

A licensed insurance agent corrects misinformation about life insurance.

The more I scour the internet, the more misinformation I find about life insurance. Its everywhere. To make matters worse, much of this information is coming from supposedly reputable websites that search engines give prominent placement in their search results. There is a dearth of fact checkers out there when it comes to life insurance, so I decided to take up the challenge and become one of them. I’ve combated misinformation in the past, but I would use a single blog post to confront a single piece of misinformation. For this blog post I will do something different. For this post I will add content each time I find more misinformation. I imagine this post will become quite large. The best advice I have for people is to use an experienced agent for information. Don’t rely on the internet if you can help it. If you must use the internet, at least make sure the author is an experienced agent (like myself).

Children Owning Life Insurance On Their Parents

I read an article today that said it may not be preferable for adult children to own life insurance on their elderly parents. The article didn’t give any reasoning for this preference. I’ll give some good reasons for children owning life insurance on their parents. The first reason has to do with Medicaid spend-down. In order for Medicaid to pick up the tab, people must not have countable assets above $2,000. Most seniors, if they have life insurance, will have a permanent policy that has cash value, and cash value is considered a countable asset (the government makes an exception if the face amount is $1,500 or less). Just so I don’t scare a bunch of people, the cash value accumulation is very slow for policies with a low face amount. However, if you would like to remove all risk of being disqualified from Medicaid because of cash value, have your children own the life insurance policy. The government could care less how much cash value is in a policy if you don’t own the policy.

Another good reason for children owning the policy has to do with cognitive decline. Cognitive decline is a natural part of aging. Seniors may eventually lack the capacity to handle their own finances. If someone owns a policy, they automatically receive all financial notices related to the policy. If an adult child owns the policy, the child receives all notices. The person who receives policy notices should be the person best equipped to handle financial problems. Some policies may be structured in a way that someone other than the owner receives notices, but this is not the default option.

Perhaps the only deterrent for children owning a policy is the application process. Many insurers require both the owner and the proposed insured to sign the application. This may be impractical if the child lives far from the parent.

Permission To Insure

One article I read today said that someone wanting to buy life insurance on you must get your permission. First, minors are exempt from the permission rule. Second, the rule can be bypassed for adults if there is a power of attorney. I will say that very few insurance companies accept signatures from a power of attorney, so you will have to do your homework to find one. You’ll also want your agent to do his or her homework because there is extra paperwork involved. The insurance company may also want a compelling reason for using a power of attorney.

Exam Requirements

A recent article said that most term insurance policies require a blood and urine sample. Here is a more correct statement: there is an escalation of underwriting requirements depending on the rating class and the amount of coverage. Sometimes the coverage amount is low enough that no medical exam is required. Even when exams are required, it can be something as minimal as an agent taking a saliva sample. You won’t know what’s required until you speak to your agent. If you are going through a full paramedical exam for life insurance, the best thing is avoiding strenuous exercise before the exam. Strenuous exercise can throw off your vitals and make you appear very ill. People have been denied coverage over this mistake.

Buying Life Insurance Without An Agent

I’ve been seeing more and more advertisements lately that say you can sign up for coverage without talking to an agent. There is no harm in talking to an agent. In fact, many consumers make the mistake of not talking to an agent and simply going with the cheapest policy they can find. The cheapest policy is likely to be term insurance with no living benefits. Living benefits are important if you develop a terminal, chronic, or critical illness during your term policy. A cheap policy may also lack conversion privileges. However, if you are only looking for a death benefit (no living benefits) and you don’t care about conversion to a permanent policy, then you can safely buy term insurance without an agent. Be careful not to sign up for accidental death insurance. Consumers sometimes sign up for accidental death thinking that its term insurance.

Increasing Coverage

When asked how to increase life insurance coverage, one article said, “simply increase the coverage limit on your existing policy.” First of all, in my 8 years as a life insurance agent, I’ve never seen a whole life policy that allows an increase in death benefit. Adding coverage usually means a separate policy and more underwriting.

The Price For Coverage

I read an article today that made the oversimplified statement that more coverage means higher premiums. Insurance premiums are based on units of coverage, and each unit of coverage equals $1000 in benefits. Insurance companies use something called banding to determine the price per unit. For example, one band might be 3 – 50 units ($3,000 – $50,000 in benefits). The lowest bands have the highest price per unit. The highest bands have the lowest price per unit. In other words, someone with a $250,000 policy will pay less per unit than someone with a $50,000 policy. Think of it as a volume discount.