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Anonymous

How does one go about figuring out how much life insurance they should have, and what kind it should be?

Mike Gilchrist
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Joined: 06/27/2010
Life Insurance Question

That is a complex question that requires some thought.  In regards to how much life insurance one should have, it really depends on the situation.  In order to protect a family in the event of the death of an income earner a rule of thumb used to be between 8 to 10 times their earnings.  Life is rarely that simple though!  Other considerations require a need to look at household debt levels, other financial requirements for education, taxes, and future goals of the family.  In a business, there are other considerations, such as key man coverage, funding a buy-sell agreement in the event of death, or share redemption.  It can be a complicated task to figure out how much life insurance you need, so it is best to seek the advice of a licenced financial planner who can help you to get the right amount for the situation.

Mike Gilchrist
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Joined: 06/27/2010
Life Insurance Questions #2 - What Type to Buy

The second part of your question is also a complex one.  There are many different types of insurance coverage available and deciding which type fits the situation best can be a daunting task.  Life insurance comes in 2 broad categories:  Term insurance and Permanent insurance.  Term insurance is coverage that is sold in terms of time (ie 10 year term), where the premium and death benefit remain the same.  That policy would renew once the term was up for a higher premium, as coverage cost more as you get older.  Term insurance also expires eventually, where it will renew no longer.  Term insurance has a great deal of application in helping people to cover temporary needs - things like a business loan, a mortgage, or to provide an income to a family in the event of death.  Permanent insurance on the other hand is coverage that does not expire, and will pay out when you die.  This type of coverage has a higher initial cost than term insurance, but the premiums generally do not increase and the policy can accumulate cash tax free.  Uses for permanent insurance are needs that require a lifelong solution such as tax payment upon death, charitable giving, creating a legacy, or even funding a child's education, or helping with retirement.  Given that this is just a very surface explanation of the types of life insurance available, it is best once again to seek out a licenced professional who can help you to match your needs and goals with the appropriate products.  Thanks for the questions. 

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