UPDATED: Jun 25, 2020
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So you’ve decided to buy term life insurance. You’ve even used an online life insurance calculator to figure out how much you need.
Congratulations — you’ve taken a big, first step toward getting a new policy. Now, you just need life insurance quotes. But before you go and plug that magic number into a life insurance website, think about how much term life insurance you can qualify for.
You see, many life insurance shoppers believe they can buy any amount of coverage they want. Want $500,000? No problem. $5 million? You got it.
Only it doesn’t work that way.
You Must Qualify — Financially.
You likely already know you have to qualify medically for life insurance through a process called underwriting. The life insurance company is going to verify that you are in good health before they issue a policy to you, for obvious reasons.
What you may not realize is you have to qualify financially for life insurance as well. The reason for this is simple: the life insurance company is trying to prevent an excess coverage situation. The company needs to ensure that if you die, your total coverage amount doesn’t exceed your beneficiary’s economic loss. This is how they protect themselves financially and, in turn, can keep life insurance costs reasonable.
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Financial Justification is All it Takes.
The core purpose of life insurance is to protect something: your family, business or estate are just a few examples. The policy’s death benefit is the amount of money the company pays your beneficiary if you die. That money can do many things, such as:
- Replace your lost income
- Pay off your mortgage
- Pay your children’s college expenses
- Pay your estate taxes
- Keep your business going
- Help a charitable cause
Your agent or company representative may use the word justification at some point. This means the life insurance company wants you to justify the amount of coverage you’re asking for. What is your annual income? How much is your net worth? Remember, life insurance is meant to protect wealth, not to create it.
These Financial Guidelines Will Help.
Life insurance companies use a multiple of your annual income as the basis the amount of coverage you can buy. These multiples look something like this:
|Life Insurance Rate Bands|
|Policy Amount||$100K – $249K||$250K – $499K||$500K – $1M||$1M+|
|Cost per Unit||$0.49||$0.45||$0.40||$0.37|
So if you are age 35 and make $50,000 a year, right off the bat you should qualify for $1.25 million of total life insurance. That’s total, as in, combined with any other policies you already have and intend to keep.
Remember this is just a starting point. The company will often consider other factors such as your net worth, asset portfolio or business operations to determine if you can qualify for more than this baseline.
It’s interesting to note that most life insurance companies will not ask for proof of income for smaller policies. Additional requirements like this usually kick in around $3 million and up. For these larger policies, you may be asked to provide additional financial information such as:
- W-2 statements
- Pay stubs
- Financial questionnaire
- Tax returns
Non-Working Spouses Need Life Insurance, Too.
And life insurance companies know the importance of this as well. So most have guidelines in place to cover you if you don’t have an income of your own. These rules range from 50 percent of the spouse’s life insurance amount all the way up to 100 percent.
There are usually limits on the maximum amount allowed for non-working spouses, with the most common being $1 million. However, some allow more. Genworth Life Insurance Company allows a non-working spouse to buy a policy up to 100 percent of the income-earning spouse’s coverage to a maximum of $3 million!
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Know Your Number Before You Apply.
When you decide to apply for term life insurance, have some idea of how much coverage you need. Then use the multipliers above to see if you can qualify based on annual income alone. If not, be prepared to justify the additional amount of coverage you’re asking for.
It’s not enough to just throw numbers at the wall and see what sticks. Ask your agent to help you present your financial situation to the company in the best light possible.
How Much Term Life Insurance Do I Need?
It doesn’t take algebra to determine your needs. It takes QuickQuote.
You may have heard you need a life insurance policy equal to 10 times your annual income. Or was it 20? The truth is, there’s no magical formula. There are all kinds of life insurance calculators out there, but each one’s likely to give you a different answer. But it’s not hard to figure out how much life insurance you need. It simply takes some guidance.
Start With a Needs Analysis
The top reason people buy term life insurance is to replace income — to protect their families. You may have other reasons… to replace your income… plan for your business… pay estate taxes… or some combination of reasons. To get an idea of the amount of life insurance you need, consider the following formula offered by the LIFE Foundation:
(Immediate Obligations + Future Income) – Existing Resources = Life Insurance Need
1. How much money will be needed to meet immediate obligations? This includes medical bills, funeral costs, estate taxes, personal loans, business debts, mortgages, college funds for children, etc. 2. How much income is needed to support your family going forward? This includes the total annual income your family would need and how long they would need that income to last. 3. What is the present value of your existing resources? Think savings, investment accounts, retirement accounts, spouses’ income and existing life insurance.
Determine the Term
You can buy term life insurance for 10, 15, 20, 25 or 30 years. To determine which is best for you, answer the following:
- How many years until my youngest child is no longer dependent?
- How many years until my mortgage is paid off?
- How many years until my spouse and I retire?
- How many years until my other long-term obligations are met?
Write down your answers. They might look something like this: 12 years, 22 years, 12 years and 2 years Use the largest number of years to select a policy for that time frame. A 25-year policy works best in our example. Another option is to layer multiple policies together to cover your needs. This approach could save you 25% or more on the cost of a single policy.
Buying the Life Insurance You Need
Start by comparing free life insurance quotes online now!