People often ask us, “Do I need life insurance?” Not everyone needs life insurance, but depending on your age and financial obligations, there are some reasons why you might want to consider buying coverage.
In this article we’ll explain the top 7 reasons that people buy life insurance, and we’ll provide some insider’s tips to help you select the right amount of coverage for your situation.
Quick Article Guide:
1. Life Insurance to Provide Income Replacement
2. Purchasing Life Insurance to Protect a Mortgage
3. Life Insurance to Secure a Business Loan
4. Purchasing Life Insurance for Final Expenses
5. Life Insurance to Protect Your Estate from Taxes
6. Purchasing Life Insurance to Fund a Buy-Sell Agreement
7. Life Insurance to Protect Your Business from the Loss of a Key Employee
8. How We Can Help You Find the Best Rates for Life Insurance
One of the most common reasons that term life insurance is purchased is to protect an income until retirement age. If something happened to you unexpectedly and you were no longer bringing home a paycheck for your family, how would they pay the bills?
If you or your spouse are the primary breadwinner for your family, you may want to consider buying a life insurance policy to provide income replacement protection for your family. Depending on your age, some life insurance companies will allow you to buy up to 35 times your current annual income in life insurance coverage. The idea is to replace your current income for your family until you reach retirement age, or until your surviving spouse is able to replace your income.
Some of our clients want to make sure their spouse does not have to work. In this situation, we recommend purchasing a life insurance policy that will replace your income until the age of 65 or later. If you think your spouse will likely return to work, you may want to purchase a policy with enough coverage to replace your income for 5-10 years. This is enough coverage to make sure your spouse will have the money they need to pay the bills while they get a degree or find a job that will replace your income.
The chart below illustrates how much coverage you can qualify for based on your current income, after taxes.
Income Multiplier (Applicant Must Be Working Full Time)
|Current Age||Maximum Amount of Coverage|
|20-24||35 x Current Income Before Taxes|
|25-30||35 x Current Income Before Taxes|
|31-35||35 x Current Income Before Taxes|
|36-40||35 x Current Income Before Taxes|
|41-45||25 x Current Income Before Taxes|
|46-50||25 x Current Income Before Taxes|
|51-55||20 x Current Income Before Taxes|
|56-60||20 x Current Income Before Taxes|
|61-65||10 x Current Income Before Taxes|
|66-70||10 x Current Income Before Taxes|
|71+||5 x Current Income Before Taxes|
*Displayed income multipliers are from A+ rated carrier and are accurate as of 02/01/2017
Everyone’s situation is different, but if you are purchasing life insurance to protect your income until retirement age, make sure you select a term that will ensure your policy is accurate until age 65 or later. Most life insurance companies offer 10, 15, 20, 25, and 30 year level terms. During this time, the life insurance cannot raise your rates or decrease your coverage.
If you have recently purchased a home, or even if you are a few years into your mortgage, you may want to consider protecting your mortgage with life insurance. Buying life insurance to protect your mortgage is simple and it provides you with peace of mind. If something happens to you, your family will not be forced to move; they will be able to continue living in the house you purchased for them.
Here’s how mortgage protection works:
Select a life insurance with a term that extends until the end of your mortgage. For example, if you purchased a 30-year mortgage and have 25 years left until your house is paid off, buy a 25-year term. Make sure you buy a term policy that meets or exceeds your mortgage, as you can always cancel the policy early with no penalties once your mortgage is paid off.
To determine the amount of coverage you need to purchase, we recommend reviewing your latest mortgage statement. Once you know how much you owe on your mortgage, buy a policy with a face amount equal or greater to this amount.
As an example, if you have a mortgage balance of $387,000 with 25 years left, we’d recommend buying a $400,000 policy with a 25-year term.
If you pass away before your mortgage is paid off, your family will have the money they need to pay off the mortgage and continue living in the home you purchased for them. As your mortgage is paid down each year, you can reduce the amount of coverage your policy offers to save money. You can assign the difference in coverage and the balance of your mortgage to your spouse, children, or any beneficiary you choose.
If you are starting a business, your bank or lender may require you to purchase a life insurance policy to secure the balance of the loan. Banks and lenders often require loan recipients to purchase life insurance to ensure that if something happens to the loan recipient before the balance of the loan is paid off, the bank will not lose their investment.
If you are purchasing life insurance to secure a SBA Loan, the bank or lender will require a life insurance policy with enough coverage to secure the balance of the loan. As the loan is paid off, you can assign the difference in coverage to a family member or business partner.
The most common term length purchased to secure a business loan is 10 years, but if you think it will take you more than 10 years to pay off the balance of your loan, we recommend buying a longer policy. Term life insurance is sold in 5-year increments and the most common terms are 10, 15, 20, 25, and 30 years.
An Example of a Client We Recently Helped:
Last year, we worked with a man named James who was starting a restaurant in Ohio. James was applying for a SBA loan for $600,000 and the bank required James to secure a 10-year term policy for $600,000 before they would approve his loan. James was 54 at the time and he is a non-smoker in great health. His policy was approved at $77.00 per month, but after he reviewed his finances, James decided to purchase a 15-year level term policy instead for $101.00 per month. He can cancel his policy at any time once the loan is paid off, but he wants to make sure his loan is paid off before his policy ends.
Clients often call us to purchase life insurance to pay for their final expenses. Final expenses consist of any debts you may have, burial costs, and any medical bills that you may leave behind. We recommend purchasing a permanent life insurance policy to leave money behind for your final expenses. This is due to the fact that most term life insurance policies end by the age of 80 and the odds of outliving them are very high. Most people purchase $50,000 to $100,000 of coverage to provide money for their final expenses.
Below are some actual rates for $50,000, $75,000, and $100,000 of coverage for a male and female in great health. These rates are guaranteed until the age of 90, but we also have policies that will extend your coverage until the age of 95, 100, 105, 110, or even 121.
Actual Life Insurance Rates for $50,000 of Coverage Until Age 120
*Displayed monthly rates are accurate as of 02/15/2017
Actual Life Insurance Rates for $75,000 of Coverage Until Age 120
*Displayed monthly rates are accurate as of 02/15/2017
Actual Life Insurance Rates for $100,000 of Coverage Until Age 120
*Displayed monthly rates are accurate as of 02/15/2017
When purchasing a permanent life insurance policy, it’s very important to consider the affordability of the life insurance policy. The permanent policies we offer do not increase in cost as you get older, but if you are retiring soon, it’s important to make sure your policy stays affordable when you are living on a fixed income. If you are unable to make the payments on your policy each month, your policy will lapse and you will be without life insurance.
If you have a large estate that you want to leave behind for future generations, you may want to consider purchasing a life insurance policy to reduce or avoid estate and inheritance taxes. When you pass away, some states and the federal government impose taxes on the value of the assets that you leave behind. Every state has its own guidelines for inheritance taxes, and the federal government imposes a 40% tax rate on the total value of your estate that exceeds the federal estate tax exemption.
In 2017, the IRS announced the current estate tax exemption rates of $5,490,000 per individual. If your state does not impose inheritance taxes, and your estate is worth less than $5,490,000 when you pass away, your heirs may not have to worry about paying estate or inheritance taxes. However, if your estate exceeds this amount, you will want to consider purchasing life insurance to reduce or avoid estate taxes.
Here’s How Estate Planning with Life Insurance Works:
When you pass away, the IRS will calculate the total value of all of your estate’s assets including property, automobiles, jewelry, bank accounts, etc. If this amount exceeds the current estate tax exemption, the value of your estate that exceeds the estate tax exemption is subject to estate taxes. In order to prevent the IRS from seizing the assets you intended to leave behind, this amount must be paid within 9 months of your passing. To find a way to settle these taxes, heirs are often forced to sell the assets you intended to leave behind for less than what they are worth.
To avoid or reduce this amount of taxes your heirs will owe, we recommend setting up an irrevocable life insurance trust. An irrevocable life insurance trust separates your life insurance from your estate so that it will not be subject to estate taxes.
To determine the amount of coverage you need, calculate the total value of your estate and subtract $5,490,000. As an example, if your estate is worth $7,000,000, your heirs will owe estate taxes on $1,510,000. Then multiply this number by 40%.
$1,510,000 x 0.40 = $604,000.
When you pass away, your heirs will owe $604,000 in estate taxes. To prevent them from having to sell off the assets you left behind for them, we recommend purchasing a permanent life insurance policy that does not build cash value. These policies are often referred to as Guaranteed Universal Life insurance and they offer fixed rates and coverage until the age of 90, 95, 100, 105, 110, and 121.
When you pass away, your life insurance policy will pay your irrevocable life insurance trust, and your trustee will then settle your estate taxes with the IRS. This will allow your estate to stay intact and prevent your heirs from owning estate taxes. The trustee of your irrevocable life insurance trust can be an attorney, an executive at your bank, or a family member. Your trustee will have to pay the IRS in accordance with your irrevocable life insurance trust.
If you own a business with one or more business partners, you may want to consider setting up a buy-sell agreement to protect your business if one of your partners passes away. There are two types of buy-sell agreements, a cross-purchase agreement and a stock redemption agreement. A cross purchase agreement is ideal for businesses with two partners, and a stock redemption agreement is ideal for businesses with 3 or more owners.
Here’s How a Buy-Sell Agreement Works:
If something happened to you or one of your business partners, how would you pay their surviving family for the share of the business they own? Would you want to work with your business partner’s spouse if needed?
To prevent a business from having to liquidate assets, sell, or employ a deceased business partner’s family members, businesses set up buy-sell agreements that are funded with life insurance. If a business owner passes away, the proceeds of the life insurance policy are used to buy the deceased owner’s share of the business from their surviving family.
To determine the amount of coverage needed for each owner, use the book value, market value, or capitalization of earnings to determine the value of your business. Then multiply the value of the business by the percentage of the business that each partner owns.
Cross Purchase Buy-Sell Agreements:
If your business is worth $1,000,000 and you have two equal owners, each owner should purchase a $500,000 policy on each other. Buy-sell agreements with two owners are called cross-purchase agreements because each owner purchases and pays for a life insurance policy on the other partner. If something happens to either owner, the death benefit from the life insurance policy is used to buy their share of the business from their surviving family.
Stock Redemption Buy-Sell Agreements:
If your business has three or more owners, you’ll want to set up a stock-redemption agreement to avoid purchasing six or more life insurance policies. With a stock redemption agreement, the company buys a policy on each owner, equal to their ownership share of the business. This prevents each owner from purchasing two policies, one for each owner. With a stock redemption agreement, the business is the payer and the beneficiary of the life insurance policy on each owner. If one of the owners passes away, the business uses the death benefit from their life insurance policy to buy their share of the business from their surviving family.
Because the value of most businesses can fluctuate, we recommend reviewing your buy-sell agreements every three years to make sure each owner has enough life insurance to cover their share of the business. If your business partners become underinsured, you can buy a supplemental policy to add to their existing coverage.
Most businesses have a few employees that are essential to the businesses’ needs. These key employees could be directors, top sales people, or even technical programmers that are vital to the survival and well-being of the business. If one of these people were to pass away, the business would suffer a financial loss.
To prevent businesses from being faced with this dilemma, life insurance is available to protect the business from the loss of a key employee.
Here’s How Key Person Life Insurance Works:
A business can purchase a life insurance policy on any key employee (with their consent) to protect their interest in the business. The life insurance policy is paid for by the business, and the business is listed as the beneficiary of the policy. If a key employee passes away, the death benefit from the life insurance policy is used to find a potential replacement, train and hire the replacement, and protect the business from any financial losses they might incur during this transition.
Most life insurance companies will allow a business to purchase a life insurance policy with a death benefit that is 5 to 10 times the employee’s annual compensation including all bonuses, salary, and commission.
Real Life Example of a Business We Helped:
We recently worked with two restaurant owners that purchased key life insurance policies to protect their business. One of the owners also works as the head chef, and he is in charge of ordering all of the supplies that the restaurant needs each week. The other owner also works as the bartender and he is in charge of overseeing the staff at the restaurant and ordering the wine, beer, and spirits for the restaurant each week.
If something happened to either owner, the other owner would suffer a huge financial loss. The chef knows the ins and outs of the kitchen, but nothing about managing the restaurant, making a drink, or ordering supplies for the bar. The other owner understands how to manage the restaurant and prepare drinks, but he doesn’t know the first thing about cooking.
To protect the business, the owners decided to each purchase a $500,000 key-person life insurance policy. If the chef passes away unexpectedly, the other owner will have the money needed to hire a new chef, even if the restaurant has to close its doors for a few weeks. If the bartender passes away, the chef will have the financial means needed to hire a new bartender that can also manage the restaurant. Without the key person life insurance, the business would probably be forced to shut its doors if either owner passed away.
Our agency works with more than 60 top-rated life insurance companies. Having access to multiple companies and their underwriting guidelines allows our agents to shop the market to match our clients with the least expensive life insurance available. We only represent “A” rated life insurance companies and we’re licensed to sell life insurance in every state.
Our services are free, and there is no cost to apply for coverage. Give us a call, toll-free: 855-902-6494, today and we’ll find your best options for affordable life insurance protection for your mortgage, family, or business. Or you can request a free instant quote online below to compare rates from dozens of life insurance companies in less than a minute.