Purchasing term life insurance can be a crucial step in ensuring the financial security of your dependents in the event of your untimely death. However, determining the appropriate amount of coverage can be a daunting task. With various factors such as financial obligations, future expenses, and the needs of your loved ones to consider, it's crucial to make an informed decision. In this article, we will discuss the factors you need to consider when determining how much term life insurance you should get, including your income, outstanding debts, future obligations, the needs of your dependents, and your desired length of coverage. By the end of this article, you'll have a better understanding of how much term life insurance you need to secure the future of your loved ones.
When it comes to purchasing term life insurance, determining the appropriate amount of coverage can be a daunting task. It’s important to consider factors such as your current financial obligations, future expenses, and the needs of your dependents. To help you make an informed decision, here are some factors to consider when determining how much term life insurance you should get:
Life insurance is a contractual agreement between an insurance company and an insured person, where the insurance company agrees to pay a specified amount, known as a death benefit, to the beneficiaries after the insured person’s death, as long as the premiums are paid and up to date. There are two types of life insurance: whole and term. Whole life policies cover the insured person for their entire life as long as the premiums are paid, while term life policies cover the insured person for a set term.
It is important to determine the amount of coverage needed when purchasing a life insurance policy. Financial experts often recommend purchasing at least 10 times your annual income in coverage, although your personal number may be higher or lower. You should consider taking out a little more to settle any extra interest or charges as well. Here are some of the most important considerations for choosing a minimum amount of life insurance:
|Consideration||Minimum Coverage Needed|
|Outstanding debts||Amount needed to pay off all debts|
|Income replacement||At least 10 times your annual income|
|Children’s education||Amount needed to cover education expenses|
|Years until children reach 18 years old||Amount needed to replace income until children reach 18 years old|
If you are single and have no dependents or have enough money to cover your debts and the expenses related to death, you may not need life insurance. The same applies if you have dependents but enough assets to provide for them after your death. However, if you’re the primary provider for your dependents or have a significant amount of debt that outweighs your assets, then insurance can help ensure your loved ones are well taken care of if something happens to you. Having a life insurance policy also makes sense if you own a business or owe cosigned debts for which someone else could be held responsible if you pass away.
Life insurance is often intended to replace the economic loss of someone with a family to support in the event of their untimely death. However, it can also be purchased by those whose children have grown up to leave an inheritance, establish a trust upon death, contribute to a charity, or if the older individual is a key employee or partner in a business. Still, many insurance companies only offer term policies for those aged 18-65, and premiums increase the older you are when you purchase the policy.
If you choose to buy insurance, use one of the common methods to calculate the coverage you’ll need before meeting with an agent or broker to avoid getting stuck with inadequate coverage or expensive coverage that you don’t need. Education is essential to making the right choice about whether you need life insurance and, if so, what level of coverage, so be sure to do your research to acquire the best life insurance for you.
Group-term life insurance coverage provided under a policy carried directly or indirectly by an employer is excluded from taxes if the total amount does not exceed $50,000, as per IRC section 79. However, if the coverage exceeds $50,000, the imputed cost of coverage must be included in income and is subject to social security and Medicare taxes.
|Policy carried directly or indirectly by the employer||Policy not carried directly or indirectly by the employer|
|Subject to social security and Medicare taxes if coverage exceeds $50,000||No tax consequences to the employee|
|Employees are taxed on the cost of coverage over $50,000||Employer has no reporting requirements|
A policy is considered carried directly or indirectly by the employer if:
A taxable fringe benefit arises if coverage exceeds $50,000 and the policy is considered carried directly or indirectly by the employer. If there is more than one policy from the same insurer, a combined test is used to determine whether it is carried directly or indirectly by the employer. However, policies can be tested separately if the costs and coverage can be clearly allocated between the two policies.
If coverage is provided by more than one insurer, each policy must be tested separately to determine whether it is carried directly or indirectly by the employer. The cost of employer-provided group-term life insurance on the life of an employee’s spouse or dependent, paid by the employer, is not taxable to the employee if the face amount of the coverage does not exceed $2,000. This coverage is excluded as a de minimis fringe benefit.
Example 1: All employees for Employer X are in the 40 to 44 year age group. The employer pays the full cost of the insurance. If at least one employee is charged more than the IRS Premium Table rate, and at least one is charged less, the coverage is considered carried by the employer. Therefore, each employee is subject to social security and Medicare tax on the cost of coverage over $50,000.
Example 2: All employees are charged the same rate, which is set by the third-party insurer. The employer pays nothing toward the cost. It does not matter what the rate is if the employer does not subsidize the cost or redistribute it between employees.
Example 3: A 47-year old employee receives $40,000 of coverage per year under a policy carried directly or indirectly by her employer. She is also entitled to $100,000 of optional insurance at her own expense. This amount is also considered carried by the employer. The cost of $10,000 of this amount is excludable; the cost of the remaining $90,000 is included in income.
It is important to understand the tax consequences of group term life insurance coverage provided by an employer to avoid any issues with reporting and taxes.
Level-premium insurance offers a fixed premium rate throughout the policy’s life. It can be either for permanent or term life insurance. The coverage amount remains the same for term policies, while it increases over time for permanent policies like whole life.
|Guaranteed same premium rate||No payout if the policyholder dies outside the fixed term|
|Cost-effective in the long run||May not cover the policyholder for their entire lifetime|
|Increased death benefit coverage over time for permanent policies||Higher upfront cost than annually-renewing policies|
The age and health of the policyholder are crucial factors in determining the optimal choice between a guaranteed, level-premium policy and an annually-renewing term policy. The length of the term policy also matters, and it is typically chosen according to the policyholder’s specific needs.
Life insurers provide level-premium policies by overcharging for the earlier years of the policy, collecting more premiums than needed to cover the risk of the insured dying during that period. The extra premiums are then credited toward later years when the insured is a higher risk.
The benefit of a level-premium term life insurance policy is paid if the policyholder dies within the fixed period. Decreasing term life insurance, on the other hand, decreases the coverage amount over time and is usually purchased to pay off a specific debt like a repayment mortgage.
In conclusion, level-premium insurance policies offer a fixed premium rate throughout the policy’s life, ensuring cost-effectiveness in the long run. It guarantees the death benefit coverage and is not subject to premium increases or interest rate changes. However, it may not cover the policyholder for their entire lifetime, and there is no payout if the policyholder dies outside the fixed term.
A 20-year term life insurance policy provides coverage for a set period of 20 years, and if the policyholder passes away during this period, their beneficiaries will receive a death benefit payout. The coverage needed for a 20-year term life insurance policy depends on age, income, debts, and any additional sources of income like social security that your loved ones may have to rely on. It’s important to consider all these factors to ensure your family is financially secure. In this article, we will discuss whether 20-Year Term Life Insurance is worth it or not.
The following are some of the essential factors to consider before purchasing a 20-year term life insurance policy:
|Current and future financial obligations||Consider your current and future financial obligations, such as mortgage payments, outstanding loans, and your children’s education.|
|Coverage amount||Calculate your coverage needs. A general rule of thumb is to cover at least ten times your annual income.|
|Premium costs||The cost of a 20-year term life insurance policy depends on various factors such as age, health, and lifestyle habits.|
|Additional features or riders||Consider any additional features or riders that may be available.|
Some of the benefits of 20-Year Term Life Insurance are:
Some of the drawbacks of 20-Year Term Life Insurance are:
A 20-year term life insurance policy can be a good choice for those who want coverage for a specific period. When considering a 20-year term life insurance policy, it’s essential to calculate your coverage needs, shop around for the best rates, and be transparent about your health and medical history with your insurance company. By following these steps, you can find a policy that fits your needs and provides peace of mind for you and your loved ones.
Our carriers beat Colonial Penn, Globe Life, and AARP 96% of the time*
* Based on website quote requests, through 5/31/23.
(Check your rate to see their rates vs. ours)
Learn how to borrow against term life insurance policies when you need cash. Understand the risks and drawbacks before you make a decision with our guide.
Learn the differences between term and universal life insurance, including coverage length, premiums, cash value, flexibility, and estate planning.
Learn about the benefits of short term life insurance and who it’s best suited for. Coverage for a limited period, lower premiums, and more.
Learn about increasing term life insurance and how it can provide additional coverage as your financial responsibilities grow. Choose your percentage or amount increase.