Millions of businesses have seen sales plummet because of the coronavirus pandemic. But for online life insurance, business is booming.
This is surprising. Historically, life insurance sales have dropped during economic downturns. The difference, of course, is that the cause of the downturn — at least partially — is people’s fear for their health and lives.
“While many industries saw sales fall sharply in the first few weeks of the COVID crisis, we’ve seen strong demand for life insurance as people focus on what matters most: family,” says Jamie Hale, CEO of Ladder, an online life insurtech.
COVID-19 has been a trigger for people who were putting off life insurance. Now, more than a third of Americans (36%) say they intend to purchase life insurance coverage in the next year, according to LIMRA’s 2020 Insurance Barometer study. Online wills and estate-planning platforms are also reporting an increase in demand. People who didn’t worry about having a will, particularly parents, are now getting their affairs in order.
More than a third of Americans (36%) say they intend to purchase life insurance coverage in the next year”
Are you shopping for life insurance? If you already have a policy, are you wondering whether you have enough coverage to cover your family’s needs? If so, congratulations. Thinking about these matters is not easy. If you’re like most people, you probably have a bunch of questions. This article provides a primer on life insurance and answers the key questions anyone who has financial dependents should know the answer to.
Do I need life insurance coverage?
If nobody depends on you financially, skip insurance. Open an investment account instead. However, if you have loved ones that rely on your income or your care, you probably need life insurance. The rest of this article will look into the types of insurance you should consider and how much coverage you need.
Here’s the long and the short of it. If you have people you care about who depend on you (usually a spouse and children), get a 20 or 30-year term insurance policy for 10 times your annual income. Make it 12 times your yearly salary if you have two or more kids or a large balance on your mortgage. The online life insurance options below provide excellent value with a minimum of fuss.
Once you’ve determined you need insurance, there are two questions you have to answer. How much? And what type of insurance should you get? That will lead to other questions, such as what is life term insurance, and how does it compare to permanent or cash value policies.
How much life insurance do I need?
A popular rule of thumb is to multiply your after-tax income by 10. So, if you make $80K a year, you may consider getting $800K of coverage. However, it all depends on:
- How many people depend on you financially?
- What are their financial needs?
- How long do you want to take care of their needs?
- How much debt do you have?
By now, you probably have realized that determining how much life insurance coverage you need is mostly a subjective decision. Some financial planners use worksheets as long as your arm with 20+ questions to determine the exact amount you should buy. This is unnecessary. Figuring how much coverage you need does not have to be complicated.
Remember, the primary purpose of your life insurance is to replace your income. Just ask yourself how many years of income you need to replace. The table below provides a multiplier based on the number of years of income you need to replace. Just multiply your current after-tax income by the number on the right column.
|Years of income to replace||Multiply your annual income by|
To illustrate, if you make $63K a year — the median annual income in 2019 — and you want to provide your family with 10 years of your income, you will need $535K of coverage ($63K x 8.5).
Here are three additional rules of thumb that will help you estimate how much life insurance coverage you need.
- Multiply your income by 10.
- Income 10x plus college expenses. This variation is useful for families with two or more kids that will have to pay for substantial education costs.
- The DIME formula. Make a list of your Debts, Income (multiply your current income by the number of years your family will need support), Mortgage balance, and the Education cost of sending your kids to college. Add it all up and deduct the value of your assets.
Which is the right type of life insurance for you?
There are two types of insurance: term insurance and cash value insurance.
Let me save you a bunch of time. Unless you’re a high net-worth individual (we are talking an estate worth more than $11 million), I recommend you get a term insurance policy. This is not the advice you’ll hear from many insurance agents. But they make about 10 times more money if they sell you a cash value policy, so don’t be too hard on them.
Of course, there are certain circumstances when buying a permanent life insurance policy with cash value is a smart move. For instance, the cash value of a life insurance policy can provide tax-deferred growth. But that is only a benefit if you have already maxed out your 401(k)s, SEP-IRAs, Roth IRAs, and other tax-advantaged retirement accounts. It can also make sense if you own a multi-million dollar business, and you don’t want your heirs to have to sell it to pay estate taxes. But for most people, it’s an unnecessary expense. Let’s dig a little deeper into the pros and cons of each policy type.
What is term life insurance?
Term life insurance, also known as pure life insurance, provides your beneficiaries with a guaranteed payment if you or whoever is covered by the policy, dies within the set term. Terms typically range from 10 to 30 years. If the term expires, then you can either renew it for another term or just let the policy expire. Term life insurance plans are cheaper than whole life insurance. This is because, unlike whole life, term life has no cash value unless the person covered dies and the beneficiary is paid the death benefit. Some term life policies have a renewable term, but the premiums will be much more expensive when you extend the term. It is a safety net, not an investment product. Consider it like auto or health insurance. You buy it hoping you will never need it. But if you do, you know your family and loved ones will be taken care of financially.
What is cash value insurance?
Cash value insurance policies include all other life insurance policies, such as whole, variable, and universal. They all combine a life insurance policy with a savings feature. Part of your premium goes to an account that may grow in value over time. This is attractive to people who don’t like the idea of spending money on life insurance cots and not getting anything back when the term ends. However, this investment account comes with fees, and the premiums will cost you 8 to 10 times more than a term life insurance policy with the same coverage.
For a more detailed comparison of the pros and cons of term and whole life insurance, read this article.
How much are life insurance rates?
It all depends on who is asking and the type of insurance you are shopping for. A term life insurance policy for a healthy 30-year-old male will likely cost around $25 per month for a 20-year policy with a $500K coverage amount. However, insurance policy rates are higher if you’re older. The overall average cost of a $250k life insurance policy for a healthy adult under 70 years is around $67.88 per month. Age and health are not the only factors an insurance company considers. The exact cost of your insurance premiums depends on several different risk factors. Read this article for a deep dive into the average cost of life insurance by age, gender, and lifestyle.
Is term life insurance taxable?
The short answer is your beneficiaries will generally not have to pay taxes on the lump sum they receive when the insured person dies. Notice this answer only applies to term life insurance and to the death benefit lump sum. This is what the IRS has to say:
Generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren’t includable in gross income and you don’t have to report them.”
However, different tax laws apply if the death benefit is paid in installments because the interest generated by the death benefit is taxable.
Will my policy cover COVID-19 deaths?
The short answer is yes (probably). It all depends on the terms of your particular policy. However, modern life insurance policies will generally cover death by any cause, with the exception of suicide. And that exception only applies if policyholders take their own life within the first two years of coverage. Remember, this is for life insurance policies. The same can’t be said for other policies, such as accidental death & dismemberment policies (AD&D) — which only cover accidental deaths, not old age or deaths caused by an illness.
According to one estimate by an Aite Group LLC consultant, life insurers will have to pay out as much as $7.2 billion in claims for coronavirus deaths if the projections of 150,000 deaths by COVID-19 are correct.
We asked Jamie Hale, the CEO of Ladder, about coverage for coronavirus. “We understand those concerns as some carriers have implemented restrictions. Our customers are covered for death due to coronavirus, so long as they disclosed all personal information in their application accurately.”
If you don’t already have a policy, restrictions due to coronavirus may delay getting one. Companies offering online life insurance often have an advantage here because they already have a streamlined underwriting workflow. “Our application is entirely digital and powered by real-time underwriting,” explains Hale. “Customers who qualify can get covered instantly without the need for face to face interaction, so we were naturally positioned to help people get covered as usual despite the shelter in place order. However, some people are required to get labs — that is because we have designed our underwriting to be intelligent and dynamic, meaning we only ask for more info if we need it. Since the pandemic, we have greatly reduced the percentage of users who need an in-person lab exam.”
Can you have multiple life insurance policies?
Yes, absolutely. Many people have two life insurance policies, one through their employer, and a personal life insurance policy. However, it is also possible to have multiple life insurance policies. In fact, layering several insurance policies with different term lengths can be a smart way to provide additional coverage when you need it the most and avoid being over-insured. This works because your age and health play a significant role in determining your policy premium costs. If you buy the policies all at once, you can sometimes save money.
For example, a family with two kids under 10 and a mortgage, may choose to get the following three policies instead of one $1 million term policy.
- #1: a 10-year term policy worth $500K to cover the living expenses of their children until they graduate from college.
- #2: a 20-year term policy worth $300K to cover the mortgage.
- #3: a 30-year term policy for $200K to provide an income to the stay-at-home spouse until he retires.
With some providers, such as Ladder, the option to modify your coverage (and premiums) is built directly into your policy. That means that rather than buying multiple policies you can get the coverage you need today and decrease it over time or apply to increase it as well
However, not all life insurance companies are accepting new applications during the COVID-19 pandemic. However, companies offering online life insurance, such as Bestow, Haven Life, and Ladder, which specialize in no-fuss term life insurance, are very much open for business. Of course, if you need to take a medical exam to finalize coverage, there may be some limitations to availability. Some life insurance companies, such as Haven Life, offer temporary coverage until you take the medical exam.
A recent study reported that 16% of consumers — about 41 million Americans –say they need life insurance coverage and don’t have it. If you have loved ones that depend on your income and you don’t have life insurance, get an inexpensive term life insurance today. If you are in reasonably good health, and under 40, you can probably get $250K to $500K of term life insurance for less than $50 a month.
Andrew is the Content Director for SuperMoney, a Certified Financial Planner®, and a Certified Personal Finance Counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.