If you have decided on a term insurance policy rather than a whole life insurance policy, you will need to determine both the term and the coverage amount of the policy. Term policies can range from as short as 1-year to as long as you would like, though the maximum on standard policies is usually 30-years. Deviations from standard terms require direct negotiation with insurance providers. In general though, a 30-year term is usually sufficient to meet most people’s needs. Insurers will generally provide as much coverage as you’d like, though many limit the coverage amount to a multiple of your current annual income, among other financial factors to help to mitigate fraudulent activities. However the coverage limitations are reasonable (e.g. 25 times current annual income).
In order to determine the term and coverage of your policy, it’s important to clearly define the purpose of the policy. Is the policy intended to replace an income stream (salary, pension payments, annuity, etc.) or is the policy intended to assist with your final expenses? Obviously with the latter, you want to make sure coverage at least extends through your life expectancy (you’ll need to consider your current health, family genes, etc.). Most policies are intended to replace an income stream in the event of an unexpected death.
Most people choose a policy that is highly correlated to their expected income-generating age. For instance, a 25-year-old may want a 30-year policy to cover the lifecycle of their remaining career; a 60-year-old may only wish to purchase a 5 or 10-year policy. There may also be specific term or 1-time payments in your future with which you would like to match the term of insurance coverage, such as the mortgage on your home or an expected business expense. Many policyholders choose a term over which their beneficiaries will transition to an independent status (children reach adulthood, spouses or significant others reach retirement age, elderly parents pass on).
There is no “right” formula for determining coverage. A general rule is 2 to 10 times your annual gross income, but each individual’s situation is unique and only you can decide what is right for you and your beneficiaries. Some things to consider:
Do you want to maintain your beneficiaries’ quality of life?
How long do you expect to care for others (children, elderly parents, etc.)?
Are your survivors able to increase their income streams?
Do you have family or friends who are able to assist with your survivors’ living expenses?
Are there specific gifts you want to leave your beneficiaries (pay for a child’s college, down-payment for a child’s first home, pay off the home mortgage, etc.).
Once you have a rough approximation of the term and coverage of the policy, you can begin the process of soliciting rate quotes. This final piece of information will enable you to determine the term and coverage that fits your risk tolerance and budget.
If you have decided on a term insurance policy rather than a whole life insurance policy, you will need to determine both the term and the coverage amount of the policy. Term policies can range from as short as 1-year to as long as you would like, though the maximum on standard policies is usually 30-years. Deviations from standard terms require direct negotiation with insurance providers. In general though, a 30-year term is usually sufficient to meet most people’s needs. Insurers will generally provide as much coverage as you’d like, though many limit the coverage amount to a multiple of your current annual income, among other financial factors to help to mitigate fraudulent activities. However the coverage limitations are reasonable (e.g. 25 times current annual income).
In order to determine the term and coverage of your policy, it’s important to clearly define the purpose of the policy. Is the policy intended to replace an income stream (salary, pension payments, annuity, etc.) or is the policy intended to assist with your final expenses? Obviously with the latter, you want to make sure coverage at least extends through your life expectancy (you’ll need to consider your current health, family genes, etc.). Most policies are intended to replace an income stream in the event of an unexpected death.
Most people choose a policy that is highly correlated to their expected income-generating age. For instance, a 25-year-old may want a 30-year policy to cover the lifecycle of their remaining career; a 60-year-old may only wish to purchase a 5 or 10-year policy. There may also be specific term or 1-time payments in your future with which you would like to match the term of insurance coverage, such as the mortgage on your home or an expected business expense. Many policyholders choose a term over which their beneficiaries will transition to an independent status (children reach adulthood, spouses or significant others reach retirement age, elderly parents pass on).
There is no “right” formula for determining coverage. A general rule is 2 to 10 times your annual gross income, but each individual’s situation is unique and only you can decide what is right for you and your beneficiaries. Some things to consider:
Once you have a rough approximation of the term and coverage of the policy, you can begin the process of soliciting rate quotes. This final piece of information will enable you to determine the term and coverage that fits your risk tolerance and budget.
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