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Life Insurance

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Life insurance Basics

At its core, a life insurance policy is a promise: to provide financial protection to your loved ones if you’re not there. The way a policy carries out that promise is defined by a few key features:

  • The death benefit: The amount of money the insurance company will pay when the insured person dies. Typically, this benefit is income-tax free.
  • The beneficiaries: The person or people who get the death benefit. It can all go to a single person (e.g., a surviving spouse), or it can be divided by percentage among a few people (e.g., a spouse could get 50%, and two adult children could each get 25%). And by the way, a beneficiary doesn’t have to be a blood relative or even a person – if you choose, you can leave all or part of your death benefit to an entity, such as a charitable cause.
  • The policy length or term: The time period that the insurer agrees to pay a death benefit. In a term policy, it’s defined as a specific number of years, such as 10, 20, or 30. A permanent policy lasts for the life of the insured, for whole life as long as premiums are paid, and for universal life as long as the policy is funded properly to pay monthly expenses.
  • The premium – The monthly or yearly payments needed to keep the policy in effect.
  • The cash value – The policy’s investment component that builds over time and can be cashed out or borrowed against.1, 2 A term policy has no cash value.

Term Life Insurance

Term life policies are exactly what the name implies: Coverage for a specific term or length of time. This is length of time is typically from 10 and 30 years. Unlike whole life insurance, there’s no cash value to the policy. For this reason, term life insurance is sometimes called “pure life insurance”. It is designed only to provide your beneficiaries a payout if you die during the term.

Individual term policies usually have level premiums, where you pay the same premium amount every month. When the term expires, there’s no more coverage – you must either go without or acquire a new policy. New term life policies will likely come at a higher cost, and the older you are, the more expensive that becomes. Many providers will allow you to convert a term policy to permanent life insurance for part or all of the coverage period. For those who receive term life insurance through an employer, the rates are typically issued “on attained age,”. This means the rates increase over time.

Whole life insurance

The simplest form of permanent life insurance is whole life insurance. It provides coverage that lasts your entire life. It includes a cash value component, where a portion of your premium dollars are placed into a cash value account. This sum grows over time on a tax-deferred basis, so you don’t pay taxes on the gains.

The three defining characteristics of a whole life policy are:

  • The level premium remains the same for life
  • The death benefit is guaranteed as long as the guaranteed premiums are paid
  • The policy includes guaranteed cash values that grow at a guaranteed rate

The cash value aspect of a whole life policy provides several significant benefits available to you while you’re still alive. While it takes a few years to grow into a useful amount, the cash value account is something that you can borrow money against, use to help pay your premiums, or even surrender it for cash to live on in retirement.

A whole life policy provided by a mutual company can also earn annual dividends on the cash value component. You receive a portion of the insurer’s profits, which can be used to increase the value of your policy and provide other benefits.

Whole Life vs. Term Life Insurance

Key differences between term and whole life insurance include:

  • The policy length: A whole life policy lasts your entire life, while a term policy only provides coverage for a limited number of years. Once the term expires, your beneficiaries are no longer entitled to a death benefit.
  • The cash value: A term policy has no value once it expires. A whole life policy is a life-long asset that can be accessed to help meet financial goals up to and after retirement.
  • The premium: For a given death benefit – e.g., $100,000 – premiums will be higher for whole life, along with the certainty that your beneficiaries will eventually be paid a death benefit.

Universal Life Insurance

Universal life insurance is another form of permanent insurance that offers the cash value and lifetime coverage benefits of whole life, with a significant and fundamental difference: the premiums are flexible.

Universal policies allow you to raise or lower the amount you pay into the policy as you see fit, within the limits of the policy. Paying in less could eventually result in the need to pay in higher amounts in later years to keep your coverage. This type of policy can adjust to your life circumstances while providing the same kind of cash value growth as whole life. Having another child, moving on to a different job, or taking out a loan to buy a business – all might be instances where a combination of security and flexibility becomes important.


Rule of thumb No. 1:

Multiply your income by 10

This is a starting point only.

The “10 times income” rule doesn’t take a detailed look at your family’s needs, nor does it consider your savings or existing life insurance policies. And it doesn’t provide a coverage amount for stay-at-home parents, who should have coverage even if they don’t make an income.

“…it’s an outdated rule,” says Marvin Feldman, former president and CEO of insurance industry group Life Happens.

The value provided by the stay-at-home parent needs to be replaced if he or she dies. At a bare minimum, the remaining parent would have to pay someone to provide the services, such as childcare, that the stay-at-home parent provided for free.

Rule of thumb No. 2:

Next: Add $100,000 per child for college expenses

Education expenses are an important component of your life insurance calculation if you have kids. This formula adds another layer to the “10 times income” rule, but it still doesn’t take a deep look at all your family’s needs, assets or any life insurance coverage already in place.

Rule of thumb No. 3:

Third: Use the D.I.M.E. formula

Take a more detailed look at your finances. DIME stands for Debt, Income, Mortgage, and Education, four areas that you should account for when calculating your life insurance needs.

  • Debt and final expenses: Add up your debts, other than your mortgage, plus an estimate of your funeral expenses.
  • Income: Decide for how many years your family would need support and multiply your annual income by that number.
  • Mortgage: Calculate the amount you need to pay off your mortgage.
  • Education: Estimate the cost of sending your kids to school and college.

Adding all these obligations together provides a much more well-rounded view of your needs. This formula is more comprehensive, but even it doesn’t account for the life insurance coverage and savings you may already have. It also doesn’t consider the unpaid contributions a stay-at-home parent makes.

The bottom line: How to accurately calculate how much life insurance you need.

Use this simple formula to find your own target coverage amount: financial obligations minus liquid assets.

  1. Calculate obligations: Add your annual salary (times the number of years that you want to replace income) + your mortgage balance + your other debts + future needs such as college and funeral costs. If you’re a stay-at-home parent, include the cost to replace the services that you provide, such as childcare.
  2. From that, subtract liquid assets such as: savings + existing college funds + current life insurance.

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4790 1st St N, St. Petersburg, FL 33703

Phone: (727) 521-4253

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