Your life insurance needs change as your life changes. When you are young, you may not have a need for life insurance. However, as you take on more responsibility and your family grows, your life insurance needs increase. Your needs may then decrease after your children are grown. You should periodically review your needs to ensure that your life insurance coverage adequately reflects your life situation.
Estimating your life insurance need
There are a couple of simple methods that you can use to estimate your life insurance need. The calculations are sometimes referred to as rules of thumb. It can be used as a basis for your discussions with your insurance professional.
The most basic rule of thumb is the income rule, which states that your insurance need would be equal to six or eight times your gross annual income. For example, a person earning a gross annual income of $60,000 should have between $360,000 (6 x $60,000) and $480,000 (8 x $60,000) in life insurance coverage.
Income plus expenses
This rule considers your insurance need to be equal to five times your gross annual income plus the total of any mortgage, personal debt, final expenses, and special funding needs. For example, assume that you earn a gross annual income of $60,000 and have expenses that total $160,000. Your insurance need would be equal to $460,000 ($60,000 x 5 + $160,000).
There are several more comprehensive methods used to calculate life insurance need. Overall, these methods are more detailed than the rules of thumb and provide a more complete view of your insurance needs.
Family needs approach
The family needs approach requires you to purchase enough life insurance to allow your family to meet its various expenses in the event of your death. Under the family needs approach, you divide your family’s needs into three main categories:
- Immediate needs at death (cash needed for funeral and other expenses)
- Ongoing needs (income needed to maintain your family’s lifestyle)
- Special funding needs (college funding, bequests to charity and children, etc.)
Once you determine the total amount of your family’s needs, you purchase enough life insurance. Taking into consideration the interest that the life insurance proceeds will earn over time, to cover that amount.
Income replacement calculation
The income replacement calculation is based on the theory that the family income earners should buy enough life insurance to replace the loss of income due to an untimely death. Under this approach, the amount of life insurance you should purchase is based on the value of the income that you can expect to earn during your lifetime. This takes into account such factors as inflation and anticipated salary increases. As well, as the interest that the lump-sum life insurance proceeds will generate.
Estate preservation and liquidity needs approach
The estate preservation and liquidity needs approach attempts to calculate the amount of life insurance needed upon your death to settle your estate. This includes estate taxes, and funeral, legal, and accounting expenses. The purpose is to preserve the value of your estate at the level prior to your death. As well, to prevent an unwanted sale of assets to pay estate taxes. This method takes into consideration the amount of life insurance needed to maintain the current value of your estate for your family. This is while providing the cash needed to cover death expenses and taxes.
We can review your current life insurance policy and find what you need
Contact us today to set up your complimentary consultation. One of our financial advisors can sit down with you and review your current life insurance policy. We can help you make the best decision for your current and future needs.
Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.
It’s a fact: People today are living longer. Although that’s good news, the odds of requiring some sort of long-term care increase as you get older. And as the costs of home care, nursing homes, and assisted living escalate, you probably wonder how you’re ever going to be able to afford long-term care. One solution that is gaining in popularity is long-term care insurance.
What is long-term care?
Most people associate long-term care with the elderly. But it applies to the ongoing care of individuals of all ages who can no longer independently perform basic activities of daily living (ADLs)–such as bathing, dressing, or eating–due to an illness, injury, or cognitive disorder. This care can be provided in a number of settings, including private homes, assisted-living facilities, adult day-care centers, hospices, and nursing homes.
Why you need long-term care insurance
Even though you may never need long-term care, you’ll want to be prepared in case you ever do, because long-term care is often very expensive. Although Medicaid does cover some of the costs of long-term care, it has strict financial eligibility requirements–you would have to exhaust a large portion of your life savings to become eligible for it. And since HMOs, Medicare, and Medigap don’t pay for most long-term care expenses, you’re going to need to find alternative ways to pay for long-term care. One option you have is to purchase a long-term care insurance policy.
However, long-term care insurance is not for everyone. Whether or not you should buy it depends on a number of factors, such as your age and financial circumstances. Consider purchasing an long-term care insurance policy if some or all of the following apply. If you:
- Are between the ages of 40 and 84
- Have significant assets that you would like to protect
- Can afford to pay the premiums now and in the future
- And are in good health and are insurable
How does Long-term Care Insurance work?
Typically, an long-term care insurance policy works like this: You pay a premium, and when benefits are triggered, the policy pays a selected dollar amount per day (for a set period of time) for the type of long-term care outlined in the policy.
Most policies provide that certain physical and/or mental impairments trigger benefits. The most common method for determining when benefits are payable is based on your inability to perform certain activities of daily living (ADLs), such as eating, bathing, dressing, continence, toileting (moving on and off the toilet), and transferring (moving in and out of bed). Typically, benefits are payable when you’re unable to perform a certain number of ADLs (e.g., two or three).
Some policies, however, will begin paying benefits only if your doctor certifies that the care is medically necessary. Others will also offer benefits for cognitive or mental incapacity, demonstrated by your inability to pass certain tests.
Comparing Long-term Care Insurance policies
Before you buy long-term care insurance, it’s important to shop around and compare several policies. Read the Outline of Coverage portion of each policy carefully, and make sure you understand all of the benefits, exclusions, and provisions. Once you find a policy you like, be sure to check insurance company ratings from services such as A. M. Best, Moody’s, and Standard & Poor’s to make sure that the company is financially stable.
Pay close attention to these common features and provisions:
- Elimination period: The period of time before the insurance policy will begin paying benefits (typical options range from 20 to 100 days). Also known as the waiting period.
- Duration of benefits: The limitations placed on the benefits you can receive (e.g., a dollar amount such as $150,000 or a time limit such as two years).
- Daily benefit: The amount of coverage you select as your daily benefit (typical options range from $50 to $350).
- Optional inflation rider: Protection against inflation.
- Range of care: Coverage for different levels of care (skilled, intermediate, and/or custodial) in care settings specified in policy (e.g., nursing home, assisted living facility, at home).
- Pre-existing conditions: The waiting period (e.g., six months) imposed before coverage will go into effect regarding treatment for pre-existing conditions.
- Other exclusions: Whether or not certain conditions are covered (e.g., Alzheimer’s or Parkinson’s disease).
- Premium increases: Whether or not your premiums will increase during the policy period.
- Guaranteed renewability: The opportunity for you to renew the policy and maintain your coverage despite any changes in your health.
- Grace period for late payment: The period during which the policy will remain in effect if you are late paying the premium.
- Return of premium: Return of premium or nonforfeiture benefits if you cancel your policy after paying premiums for a number of years.
- Prior hospitalization: Whether or not a hospital stay is required before you can qualify for LTCI benefits.
When comparinglong-term care insurance policies, you may wish to seek assistance. Consult a financial professional, attorney, or accountant for more information.
What’s it going to cost?
There’s no doubt about it: long-term care insurance is often expensive. Still, the cost depends on many factors, including the type of policy that you purchase . Premium cost is also based in large part on your age at the time you purchase the policy. The younger you are when you purchase a policy, the lower your premiums will be.
If you’re considering adding a long-term care insurance policy to your portfolio, contact us today for your complimentary consultation! We can find the best option that works for you and your financial situation and goals.
The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.
You know that you need life insurance. However, with the wide variety of insurance policies available, you may find choosing the right one difficult. Once you understand the basic types of life insurance policies, it’s really not as confusing as it seems.
Term life insurance
With a term policy, you get “pure” life insurance coverage. Term insurance provides a death benefit for only a specific period of time. If you die during the coverage period, your beneficiary (the person you named to collect the insurance proceeds) receives the death benefit (the face amount of the policy). If you live past the term period, your coverage ends, and you get nothing back.
Term insurance is available for periods ranging from 1 year to 30 years or more. You may be able to renew the policy for a new term without regard to your health, but at a higher rate. Your premium goes toward administrative expenses, company profit, and a reserve account that pays claims to those who die during the term period. As you get older, the chance that you will die increases. To cover this increasing risk, your premiums will likewise rise at regular intervals. For this reason, premiums that were quite inexpensive at the time you initially purchased your term policy will become much more expensive as you get older. Most term insurance also has a conversion feature that allows you to switch your coverage to some type of permanent insurance without answering health questions.
Traditional whole life insurance–guaranteed premiums
Whole life insurance is a type of permanent insurance or cash value insurance. Unlike term insurance, which provides coverage for a particular period of time, permanent insurance provides coverage for your entire life. When you make premium payments, you pay more than is needed to pay for the current costs of insurance coverage and expenses. The excess payment is credited to a cash value account. This cash value account allows the insurance company to charge a level, guaranteed premium* and to provide a death benefit and cash value throughout the life of the policy.
As you make payments, the cash value account grows. With traditional whole life insurance, the cash value account is guaranteed* and held in the insurance company’s general portfolio–you don’t get to choose how the cash value account is invested. However, the cash value can potentially grow beyond its guaranteed amount through the payment of dividends (profits earned by a “mutual” insurer). The cash value grows tax deferred and can either be used as collateral to borrow from the insurance company or be directly accessed through a partial or complete surrender of the policy. It is important to note, however, that a policy loan or partial surrender will reduce the policy’s death benefit, and a complete surrender will terminate coverage altogether.
If you live to the policy’s maturity date, the policy will “endow,” and the insurance company will pay the accumulated cash value (equal at maturity to the death benefit) to you.
Universal life–openness and flexibility
Universal life is another type of permanent life insurance with a death benefit and a cash value account. Like whole life insurance, the cash value is held in the insurance company’s general portfolio–you don’t get to choose how the account is invested. Unlike traditional whole life, universal life insurance allows you flexibility in making premium payments.
A universal life insurance policy will generally provide very broad premium guidelines (i.e., minimum and maximum premium payments), but within these guidelines you can choose how much and when you pay premiums. Reducing or increasing premiums will impact the growth of the cash value component and possibly the death benefit. You are also free to change the policy’s death benefit directly (again, within the limits set out by the policy) as your financial circumstances change. Be aware, however, that if you want to raise the amount of coverage, you’ll need to go through the insurability process again, probably including a new medical exam, and your premiums will increase.
Universal life policies reveal all aspects of the policy’s cost structure, including the cost of insurance (the portion set aside to pay claims) and expenses. This information is not always available with other types of policies. Another feature of universal life is the option to add the cash value to the face amount when the death benefit is paid. For example, say you die when you have $200,000 of cash value within your $1 million policy. If you chose the enhanced benefit option, your beneficiary receives $1.2 million. Keep in mind, however, that nothing is free–the increased benefit is reflected in premium calculations.
Variable life–you make the investment decisions
Like other types of permanent life insurance, variable life insurance has a cash value account. A variable life insurance policy, however, allows you to choose how your cash value account is invested. A variable life policy generally contains several investment options, known as subaccounts, that are professionally managed to pursue a stated investment objective. Choices can range from a fixed interest subaccount to a highly volatile international growth subaccount. Variable life insurance policies require a fixed annual premium for the life of the policy and may provide a minimum guaranteed death benefit*. If the cash value account exceeds a certain amount, the death benefit will increase.
Variable universal life–the ultimate in flexibility
Variable universal life combines all of the options and flexibility of universal life with the investment choices of a variable policy. It is a true hybrid product, and you make most of the policy decisions. You decide how often and how much your premium payments are to be, within guidelines. With most variable universal life policies, you get no guaranteed minimum cash value or death benefit. Your premium payments in excess of administrative costs and the cost of insurance are invested in the variable subaccounts that you choose.
As with both variable and universal life insurance, your policy may lapse if the cash value account falls below a certain level. Low-interest loans can be taken against your cash value account, and cash withdrawals are available. However, keep in mind that your policy’s face amount is reduced by the amount of a policy withdrawal, and withdrawals may be taxable. You have the option of choosing a fixed or enhanced death benefit. Today, most variable universal life policies offer a rider that guarantees the death benefit at a certain level regardless of the performance of the subaccounts, provided that a stated minimum premium is paid for a predetermined number of years*.
Note: Variable life and variable universal life insurance policies are offered by prospectus, which you can obtain from your financial professional or the insurance company. The prospectus contains detailed information about investment objectives, risks, charges, and expenses. You should read the prospectus and consider this information carefully before purchasing a variable life or variable universal life insurance policy.
*Any guarantees associated with payment of death benefits, income options, or rates of return are subject to the claims-paying ability of the insurer.
Joint or survivorship life for you and your spouse
Some married couples choose to buy insurance together within the same policy. These policies take the form of either a joint first-to-die or a joint second-to-die (survivorship) design. With first-to-die, the death benefit is paid at the death of the spouse who dies first. With second-to-die, no death benefit is paid until both spouses are deceased. Second-to-die policies are commonly used in estate planning to create a pool of funds to pay estate taxes and other expenses due at the death of the second spouse. Joint and survivorship policies are generally available under any type of permanent life insurance. Other than the fact that two people are insured under one policy, the policy characteristics remain the same.
If you’re considering adding a life insurance policy, contact the experts at Sterling Advisor Group to get started on designing a policy that’s right for you. Set up a meeting with a financial partner today.
Planning for your family and your retirement are two things most people need to do but put off. The good news is there are a variety of opportunities available that can help you to find the financial support you need at any stage. For many people, indexed universal life insurance is one important tool.
What Does Indexed Universal Life Insurance Offer?
Indexed universal life insurance is somewhat like universal life insurance. These policies place a portion of your premium payments into a term life insurance policy. The rest of the funds are added to a cash value. They pay for the fees, but also contribute to the buildup of the cash value of the plan.
What makes an indexed plan a bit different is that the cash value is credited with interest to the account based on an equity index. This can happen one time a month or annually depending on the plan itself. The performance of the equity index is key. Any gains achieved are applied to the cash value of the policy based on the amount of participation, called the participation rate, that is set by the insurer. This can range from as low as 25 percent or up to as much as 100 percent.
What Does It Mean to You?
An indexed universal life insurance policy allows you to gain several benefits. First, there’s a death benefit in place for a specific term. Should you die while this is in place, the policy pays a set amount to your named beneficiary. Second, a portion of each payment builds up the cash value of the policy. This fund allows you to benefit from it in a variety of ways. For example, many people use it as a way to fund their retirement. These funds become accessible during your lifetime, allowing you to have some financial benefit to the policy now.
What Is the Right Investment for You? Let Our Team Help You
At Sterling Financial, our experienced professionals are here to answer your questions and to create a strong, confident plan for caring for all of your needs. Contact our team to talk about indexed universal life insurance and other investment options available to you.