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How Much Life Insurance Do You Need?

How Much Life Insurance Do You Need?

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. These calculations are sometimes referred to as rules of thumb and can be used as a basis for your discussions with your insurance professional.

Income rule

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 (e.g., college). 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).

Several more comprehensive methods are 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, taking 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, funeral, legal, and accounting expenses. The purpose is to preserve the value of your estate at the level prior to your death and 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 while providing the cash needed to cover death expenses and taxes.

Are you 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.

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.

Do I need Life Insurance?

Do I need Life Insurance?

At some point in your life, you’ll probably be faced with the question do I need life insurance.

Life insurance is a way to protect your loved ones financially after you die and your income stops. The answer to whether you need life insurance depends on your personal and financial circumstances.

Should you buy life insurance?

You should probably consider buying life insurance if any one of the following is true:

  • You are married and your spouse depends on your income
  • You have children
  • You have an aging parent or disabled relative who depends on you for support
  • Your retirement savings and pension won’t be enough for your spouse to live on
  • You have a large estate and expect to owe estate taxes
  • You own a business, especially if you have a partner
  • You have a substantial joint financial obligation such as a personal loan for which another person would be legally responsible after your death

In all of these cases, the proceeds from an insurance policy can help your loved ones continue to manage financially during the difficult weeks, months, and years after your death. The proceeds can also be used to meet funeral and other final expenses, which can run into thousands of dollars.

If you’re still unsure about whether you should buy life insurance, a good question to ask yourself is: If I died today with no life insurance, would my family need to make substantial financial sacrifices and give up the lifestyle to which they’ve become accustomed in order to meet their financial obligations (e.g., car payments, mortgage, college tuition)?

If you need life insurance, don’t delay

Once you decide you need life insurance, don’t put off buying it. Although no one wants to think about and plan for his or her own death, you don’t want to make the mistake of waiting until it’s too late.

Periodically review your coverage

Once you purchase a life insurance policy, make sure to periodically review your coverage–especially when you have a significant life event (e.g., birth of a child, death of a family member)–and make sure that it adequately meets your insurance needs. The most common mistake that people make is to be underinsured. For example, if a portion of your life insurance proceeds are to be earmarked for your child’s college education, the more children you have, the more life insurance you’ll need. But it’s also possible to be overinsured, and that’s a mistake, too–the extra money you spend on premiums could be used for other things. If you need help reviewing your coverage, contact your insurance agent or broker.

Are you 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.

Types of Life Insurance Policies

Types of Life Insurance Policies

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.

What Is Indexed Universal Life Insurance?

What Is Indexed Universal Life Insurance?

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.

What is term life insurance?

What is term life insurance?

If you’re considering a life insurance policy, you’re probably wondering if term life insurance is the right one for you. Though it’s easy to think that all policies are the same, the difference is in the details.

One of the main differentiating factors of term life insurance is that it has an expiration date. In other words, term life insurance is temporary. Many people choose a term life policy to protect against premature death. If the policyholder passes away during the term of the policy, their beneficiaries are guaranteed to receive a death payment.

Use this checklist of questions to determine if you need term life insurance:

  • Would my husband or wife be okay financially if I passed away? Think about short-term funeral expenses and long-term expenses, like a car, school, health, etc.
  • Would your kids be okay financially if you passed away? This will likely depend on their age. Think holistically and don’t forget about college and other large expenses.
  • Am I self-insured? If you’ve built up savings and a nest egg for retirement, you might not need a life insurance policy because you would be considered self-insured.
  • Do I have any debt? If you have a mortgage or any consumer debt, will your family be able to make the payments without your income?
  • Can I afford term life insurance? Term life insurance is an affordable option. Often the better question is, can you afford not to have it?

Many people who are interested in term life insurance are curious how long the policy lasts. You, the policyholder, determine the length of the term. If you only need coverage for 10 years, that’s possible with term life insurance. Common term lengths are 10, 20, 25, or 30 years. Over the length of the term, the death benefit and the monthly payments are consistent and don’t ever change.

So, what happens when the policy expires? Once you’re at a stage in your life when you’re considered self-insured, it’s okay to let your term life insurance expire. This is one of the main reasons people choose term life insurance. You control when it is active and when you no longer need it.

If you’re considering adding a life insurance policy to your portfolio, 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!

Life Insurance You Should Start Considering

Life Insurance You Should Start Considering

If you’re considering a life insurance policy, you’re probably aware that there are many different types of policies. Though it’s easy to think that all policies are the same, the difference is in the details.

The major component of life insurance is the death benefit, which is the amount of money paid to a beneficiary after the policyholder passes away. Many factors determine the amount of a death benefit including income, number of children, pre-existing medical expenses, etc. The death benefit is either level or decreasing over the course of the policy.

Whole life and universal life are both permanent life insurance options that offer guaranteed coverage. Whole life insurance is a long-term investment and offers policy holders level premiums and a cash savings benefit. Universal life offers the same guaranteed coverage, but offers flexibility when it comes to premiums, death benefits, and cash savings.  

Permanent life insurance never expires. These types of plans are considered long-term investments and are a popular option for those who want their beneficiaries to receive a guaranteed death benefit payment.

Whole Life Insurance

If you’re choosing to invest in a whole life insurance policy, you will be expected to pay the same premium every month. When you sign your policy contract, the amount of money that will be paid to your beneficiaries will be laid out in front of you. You’ll likely discuss the type of coverage you’re looking for with your broker. Here are some advantages of a whole life policy:

  • Pay the same amount every month
  • Guaranteed death benefit payment
  • Death benefit doesn’t change
  • Build up a cash reserve with tax-deferred funds
  • Withdraw from savings fund at any point

From the beginning, you’ll know the exact amount of coverage your beneficiaries will receive and it won’t change the entire life of the policy.  

Whole life policyholders also have the potential to build up a cash reserve by making payments beyond the premium or reinvesting any earned dividends. These savings funds are tax-deferred and can be accessed by requesting a withdrawal or loan, which is a benefit that universal life doesn’t usually offer.

Universal Life Insurance

Universal life insurance, also known as adjustable life insurance, offers more flexibility than whole life insurance. With this type of policy, you have the option to increase or decrease your coverage. If you decide you want your beneficiaries to receive a smaller death benefit payment, you can adjust it even after the policy is active. This option allows you to cater your policy to the circumstances of your life at any given time.

The cash savings option for universal life customers is important to understanding one major differentiating factor from whole life. Because you can accumulate cash, with universal life insurance you can skip your premium payment if you have enough in your cash savings to cover that month’s expenses.

Term Life Insurance

Unlike whole and universal life, term life does have an expiration date. Because term life insurance is temporary, it is typically a cheaper option. Many people choose a term life policy as a way to protect against premature death. If the policyholder passes away during the term of the policy, their beneficiaries will receive a payment.

The policyholder determines the length of the term. If you only need coverage for 10 years, that’s possible with term life. Like whole life, the death benefit and the monthly payments are consistent and don’t ever change. Many term policy holders often wonder what will happen when their coverage expires. With plenty of savings, it’s okay to let your term life insurance expire.

Self-Insured Policy

If you’ve paid down your debts and invested in your future, you probably won’t always need to be paying for life insurance. If you are financially stable and on track to meet your retirement goals, you can consider yourself self-insured. This scenario most often comes to fruition later in life when kids are in college and you and your spouse are nearing retirement.

If you’re considering adding a life insurance policy to your portfolio, 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!