When it comes to purchasing life insurance wether term or permanent, most people guess how much insurance coverage they need. We find that this method of buying life insurance leaves people either under insured or with too much insurance coverage costing them more than it should.
Buying term life insurance isn't one size fits all. What one person's insurable needs are would not be the same for the next person. So there are some things to consider to make sure you are getting the most for your money. The first thing you want to consider is the term length. Next, you want to figure out the amount of coverage you need. You can do this by using the formula below called D.I.M.E.
Keep in mind that the first quote that you get may or may not be the final quote. The final rate would be determined on your health, if you smoke and any riders that you add on to the policy.
Let's look at the length of term that you may need. Term lengths are 10, 15, 20, 25 and 30 years.
How do you decide what length of term that you need? People buy term insurance for many different reasons. They may buy term insurance to make sure their family will be able to pay off any debts such as a mortgage if the breadwinner of the family were to pass away.
In this case, they would purchase term insurance for the length of the balance of the mortgage. If the mortgage will be paid off in 15 years they would buy a 15 year term. The only drawback to this is after 15 years there would be no more coverage.
It's usually best to purchase term life insurance for the longest period of time (30 years) to make sure you are covered for the longest period possible.
Let's say the mortgage balance is $500,000 and will be paid of in 15 years, you could purchase a combined 30 year term policy that covers the $500,000 mortgage for 15 years and the next 15 years decreases in face amount to whatever your insurable need is. Let's say $50,000. Since your face amount lowers to $50,000 in the 16th year after the mortgage is paid off your premium will decrease as well.
Please keep in mind that a mortgage is not the only reason to buy term life insurance. This is just an example of how to use term insurance.
Amount of coverage needed
There is an easy formula to use when figuring out how much life insurance you need to be covered for. The acronym used is called D.I.M.E.
Debt and final expenses - add up all of your current debt such as credit cards, car payments. loans, etc. (Don't include your mortgage here.) Then add up the cost of funeral and burial expenses.
Income - take your annual income and multiply it by 10. If your income is $130,000 a year then you would need $1,300,000. This would give your family 10 years of your income in the event that you were to pass away. This will allow your family to live the same lifestyle that they are accustomed without having to sell the family home or move.
Mortgage - calculate the balance of the current mortgage that would need to be paid off. This would allow your family to pay off the mortgage of the family home without having to sell it or worry about how they will come up with the monthly payments.
Education - Multiply four (years) times the amount of college tuition for each child.
-- Riders --
A rider is a provision that is added on to your insurance policy that provides additional benefits. Here are some examples of riders:
Critical Illness rider
Today, the need for critical illness protection is greater than ever. Why? Medical advances coupled with greater life expectancy make it more likely for you to survive an illness that would have been fatal in the past. And if you do survive a critical , you may find yourself with financial challenges that you hadn't considered such as loss of income, medical expenses or additional childcare.
Critical illness conditions can vary among insurance companies but some examples of what would be included are:
Major organ transplant.
Most life insurance companies would issue a check to the insured to be used at your discretion. The amount of the payment would be specified in the policy.
Chronic Illness rider
Chronic illness is an illness that lasts 3 or more months. This may put a financial burden on most people because they would not be able to work and may have lots of medical expenses.
Some examples of what would be considered chronic conditions are but not limited to:
Chronic Obstructive Pulmonary Disease
Chronic Kidney Disease
Terminal Illness Rider
A terminal illness is an illness or physical condition that is diagnosed and certified by a physician to have no cure and be reasonably expected to result in death within a short period of time (usually within 24 months from the date of certification).
Child Protection rider
No parent wants to think of anything happening to their child but children need to be considered when buying life insurance. Children can be added on to the parent's insurance policy for a very affordable rate. Coverage for children would be purchased in units of $1,000.
Return of Premium rider
Some people don't buy life insurance because they feel that if they outlive the policy it would be a waste of money. The return of premium rider would return all or most of the premium that was paid by the insured in the case that the insured outlives the policy.
Disability Income rider
If you were to become disabled and couldn't go to work anymore the insurance company would pay you an income. The length of payment and amount are determined by the policy.
Waiver of Premium rider
If you become totally disabled and can no longer work you would not be liable for paying the premium.
When purchasing a term life insurance policy it may be a good idea to go over the different riders that the insurance company has with an insurance agent since they are usually not advertised on the company's website. This way you can make an informed decision on what is right for you.