One Million May Not Be Enough
Have you noticed there seems to be a magic number offered by insurance brokers when it comes to offering Term Life insurance? Typically, when a prospect asks the “how much do I need?” question, the simple answer provided by agents in a hurry is, “let’s start with a million dollars and then go from there.” A million dollars in insurance coverage seems like a lot of coverage, but when we consider all the financial needs of the family, it may fall well short. Let’s take a look at a typical family of four:
Needs Analysis
Assumptions – A family of four with a working husband earning $80,000 annually, a stay- at- home Mom, and two children ages 12 and 14. The family’s current needs are:
- Replacement of income for 10 years – $800,000
- Mortgage Balance – $200,000
- Vehicle loan balance – $12,000
- College tuition at $20,000 per year for two children – $160,000
- Final Expenses for Funeral/Burial – $12,000
- Credit Card debt – $8,000
- Spouse Coverage – $250,000
- Child Coverage – $30,000
Total face amount needed: $1,472,000
Cost to Cover
After completing a simple needs analysis, we have concluded that this typical family of four will need about $1,500,000 rather than the $1,000,000 that the broker may have offered. We also know that since many of these expenses may be reduced over time, it makes sense to purchase a 20-year term policy and then convert it to permanent coverage with a lower face amount towards the end of the policy period. The insured will not have to worry about health issues at that time since does not require that medical history be considered to issue the policy.
Based on current term life rates for a 35-year-old healthy non-smoker, the prospect can expect to pay the following rates for the $1.5 million dollar policy:
10 year Term 15 year Term 20 year Term
35 year old Male $40 $54 $75
Riders to Consider
Similar to permanent insurance, a Term Insurance policy can be tailored to meet the needs of every individual’s unique situation. Riders can be added to the basic policy to build a life insurance to meet the specific needs during the policy period:
- AD&D – The Accidental Death and Disability Rider will typically pay double the face amount if the insured’s death is the result of an accident rather than an illness. The additional premium for this benefit is very affordable and makes this rider a great value for additional coverage.
- Accelerated Death Benefit – Considered a living benefit, the ADB allows for the insured to collect a large portion of the death benefit in advance if he or she is diagnosed with a life-ending illness. In many cases, there is no additional charge for the rider.
- Waiver of Premium – The waiver of premium rider allows the insurance carrier to waive premium payments if the named insured becomes disable and unable to work. Typically, there is a small additional premium for the rider.
- Children’s Term Rider (CTR) – The CTR allows the named insured to add his or her children and any children born during the policy term to the policy. Most insurers will allow the named insured to select a lower amount of life insurance that will cover all children under that amount. The additional premium for the CTR is considered to be an exceptional value.
- Return of Premium Rider – The return of premium rider allows the named insured to be refunded all premiums paid into the policy if the insured outlives the policy term. Although there is a significant charge for this rider, it makes very good sense to purchase it because the returned premium is not taxable and the funds can be used to purchase a permanent policy or invest into the insured’s retirement plan.
Since the rates are considerably low for the benefit received, Term Insurance is a very affordable way for the insured to obtain the peace of mind knowing that his or her family will remain financially stable in the event of his or her death or terminal illness.
