|  Q:
How much life insurance should an individual own?
A: Rough "rules of thumb" suggest an amount of life insurance
equal to 6 to 8 times annual earnings. However, many factors should
be taken into account in determining an estimate of the amount of
life insurance needed.
Important factors
include:
- Income sources (and
amounts) other than salary/earnings
- Whether or not the
individual is married and, if so, what is the spouse's earning
capacity
- The number of individuals
who are financially dependent on the insured
- The amount of death
benefits payable from Social Security and from an employer –
sponsored life insurance policy
- Whether any special
life insurance needs exist (e.g., mortgage repayment, education
fund, estate planning need), etc.
It is recommended that
a person's insurance representative be contacted for a calculation
of how much life insurance is needed.
Q:
What about purchasing life insurance on a spouse and on children?
A: In certain circumstances, it may be advisable to purchase life
insurance on children; generally, however, such purchases should
not be made in lieu of purchasing appropriate amounts of life insurance
on the family breadwinner(s). It is of utmost importance that the
income earning capacity of the primary breadwinner be fully protected,
if possible, through the purchase of the required amount of life
insurance before contemplating the purchase of life insurance on
children or on a non-wage earning spouse. In a dual-earning household,
it is important to protect the income earning capacity of both spouses.
Life insurance on a non-wage earning spouse is often recommended
for the purpose of paying for household services lost at this individual's
death.
Q:
Should term insurance or cash value life insurance be purchased?
A: Although a difficult question – one whose answer will vary
depending on circumstances – several principles should be
followed in addressing this issue.
It must first be recognized
that in any life insurance purchasing decision, there are at least
two basic questions that must be answered:
- How much life insurance
should I buy?
- What type of life
insurance policy should I buy?
The question contained
in (1) involves an "insurance" decision and the question
contained in (2) requires a "financial" decision.
The "insurance"
question should always be resolved first. For example, the amount
of life insurance that you need may be so large that the only way
in which this needed amount of insurance can be afforded is through
the purchase of term insurance with its lower premium.
If your ability (and
willingness) to pay life insurance premiums is such that you can
afford the desired amount of life insurance under either type of
policy, it is then appropriate to consider the "financial"
decision – which type of policy to buy. Important factors
affecting the "financial" decision include your income
tax bracket, whether the need for life insurance is short-term or
long-term (e.g., 20 years or longer), and the rate of return on
alternative investments possessing similar risk.
Q:
How does mortgage protection term insurance differ from other types
of term life insurance?
A: The face amount under mortgage protection terminsurance decreases
over time, consistent with the projected annual decreases in the
outstanding balance of a mortgage loan. Mortgage protection policies
are generally available to cover a range of mortgage repayment periods,
e.g., 15, 20, 25 or 30 years. Although the face amount decreases
over time, the premium is usually level in amount. Further, the
premium payment period often is shorter than the maximum period
of insurance coverage. For example, a 20-year mortgage protection
policy might require that level premiums be paid over the first
17 years.
Q:
Can an existing life insurance policy be used toprovide for the
repayment of an outstanding mortgage loan?
A: [Note: this answer is based on the Insurance ServicesOffice's
HO-3 policy.] Coverages A and B provide protection to the dwelling
and other structures on the premises on an "all risks"
basis up to the policy limits. The policy limit for Coverage A is
set by the policyowner at the time the insurance is purchased. The
policy limit for Coverage B is usually equal to 10% of the policy
limit on Coverage A. Coverage C covers losses to the insured's personal
property on a named perils basis. The policy limit on Coverage C
is equal to 50% of the policy limit on Coverage A. Coverage D covers
the additional expenses that the policyowner may incur when the
residence cannot be used because of an insured loss. The policy
limit for Coverage D is equal to 20% of the policy limit on Coverage
A. The coverage limit on Coverage E – Personal Liability –
is determined by the policyowner at the time the policy is issued.
The coverage limit on Coverage F – Medical Payments to Others
– is usually set at $1,000 per injured person.
Q:
Is credit life insurance a good buy?
A: Credit life insurance is frequently more expensive than traditional
term life insurance. Further, if you already own a sufficient amount
of life insurance to cover your financial needs, including debt
repayment, the purchase of credit life insurance is normally not
advisable due to its relatively high cost.
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