Table of Contents:


  • Insured

    The person who the life insurance protection is on.

  • Beneficiary

    The person or people who will receive the benefit amount if the insured were to die.

  • Policy Owner

    The person who owns the life insurance policy. This can be the insured, the beneficiary, or a third party like a trust.

  • Life Insurance Company

    The companies which issue life insurance policies.

  • Policy

    The contract between the policy owner and the insurance company which lays out the terms of the agreement.

  • In Force

    Your policy is active and you are now covered.

  • Face Amount

    The amount of money paid to the beneficiary if the insured were to die. Also, know as the benefit amount or death benefit.

  • Premium Payment

    The amount of money paid by the policy owner to the insurance company to keep the policy in force.



Life Insurance 103


Do I Need Life Insurance?

If you have anybody in your life that you care about, especially if they are dependent on you, then you probably need life insurance.

Who does not need life insurance?

  • You probably don't need life insurance if you do not have anybody who depends on you or your income, and you have enough money saved for your final expenses.
  • If your household income is below $30,000, you probably shouldn’t have life insurance. Life Insurance is important, but other necessities are certainly more important.
  • If you are retired, you have enough money saved to cover your final expenses, you are not married, or your spouse will have access to your retirement funds (social security, pension, 401k, etc.) after your death; you probably don’t need life insurance.

The Most Common Reasons People Buy Life Insurance

  1. Get Married
  2. Expecting a Child
  3. Bought a new home
  4. Starting a Business
  5. They financially support their elderly parents.

The reasons why people need Life Insurance

Personal

  1. Income Replacement
  2. Pay of Debts
  3. Build up a tax-free cash value retirement
  4. Final Expenses
  5. College Education for Children

Business

  1. Key-Man
  2. Buy-Sell Agreement
  3. Secure a loan

How can Life Insurance Protect my Family?

Life Insurance can never replace the love of a parent or spouse, but the only thing worse than losing a loved one is having to figure out how you are going to survive without money. You put a roof over their head, food on their plate, clothes on their backs, and provide the very foundation for their lives. Life Insurance protects your family’s lifestyle and livelihood.

Your family’s future is in your hands; let Life Insurance help protect their future.

Moral Obligation for Life Insurance

As the breadwinner, you have taken on the financial responsibility of supporting your family.

But what happens if you are not here?

Are you not obligated in death, as you were in life, to still support your family? If not, to maintain their standard of living with life’s luxuries, to at least support the necessities of life for them?

For some families, Life Insurance becomes the most important financial decision they ever made because it allows them to keep their living standards and dignity.

How Much Life Insurance Protection Do I Need?

At Simple Term Life, we came up with the money tree principle to determine exactly how much life insurance protection we think our clients should have. Life Insurance is a very personal choice, and there are no right or wrong answers. Some families will spend less on life insurance and have just enough to ensure the bare essentials are taken care of.

Other families go above and beyond and try to make sure that every little need and desire will be taken care of if the breadwinner of their family were to pass away. We believe the Money Tree Principle will get your family as close to their current living standards and lifestyle as possible.

The Money Tree Principle

Imagine you had a tree in your yard that grew dollar bills instead of leaves, and the amount of money this tree produced was very similar to your own personal income.

How much would you insure that tree for in case it died?

This thought experiment will give you an idea of how much Life Insurance you should be considering for yourself.

Here is the formula we recommend to determine the right amount of life insurance protection that you should have for your family’s future.

Multiply your current income by the number of years you have left until retirement, then cut that number in half. We recommend this because half of your income most likely goes to taxes and your personal living expenses.

This amount of coverage will ensure that your family is financially stable whether you are here or not.

There are many approaches that financial advisors have used to determine the right amount of life insurance that families should have. Here are three other popular methods used to determine the right amount of life insurance protection.

Multiples of Income vs. Human Life Value vs. Needs Approach

Multiples of Income

Multiples of Income is the simplest formula to use. Get somewhere between 10 - 12 times your income. If you make $50,000, then buy $500,000

Human Life Value

Human Life Value is a more detailed approach than Multiples of Income. Here we try to figure out what the financial value of your life will be from this point going forward. How much money do you make now? How much money will you make in the future? This is a more effective way to determine your life insurance needs because it takes to age is a factor. The younger you are, the more life insurance you’ll need because your value is greater from an income standpoint. At age 30, you’ll have 35 years of income to make up for if you were to die. At age 40, you’ve already made 10 years of income, so you’ll only have to make up for 25 years of income loss at this point.

The Needs Approach

The Needs Approach is the most detailed approach. Instead of multiplying your income by 10 or determining the economic value of your life over time, you determine all of your needs. Here you determine every expense your family has, add up all of those expenses, and then multiply by the number of years you’ll need to meet those needs and try to meet those expenses with Life Insurance if the breadwinner dies.

Key Terms:


  • Insured

    The person who the life insurance protection is on.

  • Beneficiary

    The person or people who will receive the benefit amount if the insured were to die.

  • Policy Owner

    The person who owns the life insurance policy. This can be the insured, the beneficiary, or a third party like a trust.

  • Life Insurance Company

    The companies which issue life insurance policies.

  • Policy

    The contract between the policy owner and the insurance company which lays out the terms of the agreement.

  • In Force

    Your policy is active and you are now covered.

  • Face Amount

    The amount of money paid to the beneficiary if the insured were to die. Also, know as the benefit amount or death benefit.

  • Premium Payment

    The amount of money paid by the policy owner to the insurance company to keep the policy in force.