The most common application of life insurance is in the protection of the family unit.
Often, one parent is the primary income earner while the other parent stays at home to raise the family. Few couples under age 50 own sufficient assets to provide adequate income to maintain the family’s current lifestyle upon the demise of the working parent.
To protect the family, life insurance is often purchased on the income earner in an amount that when added with other assets and invested can produce a level of income that would enable a family to remain in its world. It’s been said that widows and orphans don’t live on capital but on income.
Many couples today underestimate the amount of capital required when invested to produce an adequate level of income.
The invested income on $1,000,000 was once considered to be adequate for providing for a family. However, with lower investment rates of return available today, the income produced is very limited without increasing investment risk. The after-tax rate of return for a $1,000,000 estate earning 4% is as low as $25,000 to $30,000 annually.
Often, the mortgage is insured through the couple’s bank – this is significantly more expensive than individual coverage from any life insurer – but at least eliminates the monthly mortgage payment. Once the net income is determined and an interest rate assumed, the amount of capital can be determined and any shortfall can be covered by the purchase of additional insurance.
A second consideration for the family is to provide coverage on the life of the stay-at-home parent to accommodate the expense of child home care, such as a nanny. This new expenditure is often overlooked in protecting the family unit.
In a two income family, the loss of a partner can also affect the family’s or survivor’s ability to maintain current earnings. Insurance can be purchased to replace a significant portion of the lost income.
Ten-year and twenty-year term insurance is inexpensive and is the most economical insurance product to be considered until there is more discretionary cash available to cover more permanent needs.
Always apply for new coverage prior to the tenth year renewal date as substantial savings can result if able to pass an insurance medical exam at that time.
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Thanks to Gary Clark of Clark Insurance for providing much of this content.