FAQ
Table of Contents
Auto
How do Car Insurance companies calculate my premuim?
A car insurance premium is the amount of money you pay your auto insurance provider to keep your auto insurance valid. Most insurers require that you pay that premium either in full every 6 or 12 months, or pay the premium with month to month payment plans. This premium is generally based on personal details like:
- Type of Car: If the vehicle model has a high theft or crash rates (such as sports cars) you insurance premium may be higher. The vehicle’s value also determines the cost of comprehensive and collision coverage. As such, newer cars tend to be more expensive to insure than older vehicles.
- Driving Record: Having a poor driving record (speeding tickets, past accidents, DUI, traffic violations or other incidents) will increase your auto insurance rates for a period of time, usually around three years after each violation.
- Driving Habits: The more often you drive, the more it will affect your premium. Although some insurers do offer usage-based discounts for drivers who don’t use their vehicles often.
- ZIP Code: Crash and theft rates in your area can impact your premium rates. The state you reside in also matters, as each state has different insurance regulations and required minimum coverages.
- Age: Younger drivers usually pay more for auto insurance. While more older, experienced drivers receive lower rates until around age 55, when rates start to rise slightly again.
- Gender: In some states, people listed as men are charged higher premiums than those listed as women or vice versa. While in other states (such as: California, Hawaii, Massachusetts, Michigan, Montana, North Carolina and Pennsylvania), insurers are not allowed to base premiums on gender.
- Credit History: Depending on the state you reside in, having a better credit score means better auto rates while having a poorer credit score leads to higher auto rates. In California, Hawaii, Massachusetts and Michigan however, insurers aren’t allowed to set rates based on your credit score.
- Marital Status: Sometimes Married drivers can receive lower auto insurance rates than if they were single.
- Coverage Level: You’ll pay the lowest premium if you only carry your state’s minimum required coverage. Purchasing higher coverage limits or more extensive policies will increase your auto premium.
- Deductible: Collision and comprehensive insurance policies usually include a deductible. Having a higher deductible will result in lower premiums.
- Discounts: Any eligible discounts you can get do affect your rate. Some of the most common car insurance discounts are: homeowner’s discount, military discount, multiple policy discount and pay-in-full discount.
What is the recommended amount of coverage for my auto needs?
The main component of car insurance — liability coverage — pays others for injuries, deaths and property damage you cause, but only up to your policy’s limits. These Liability limits are often listed in a format like “25/50/15.” Using the previous format as a example, your insurer would pay $25,000 per person and $50,000 per wreck for any injuries you’re responsible for, and up to $15,000 for any property damage you cause. While Minimum bodily injury limits can be as low as $15,000 in some states, a serious accident can very easily result in medical bills much higher than those limits. The average cost of a crash resulting in non-disabling injuries was more than $40,000 in 2021, according to the National Safety Council. If you don’t have enough liability coverage to pay for the other driver’s bills, the damages will come of your pocket — or worse, face legal action.
Unless you live in Virginia or some remote parts of Alaska, Start by considering your net worth and how much you drive when determining your policy’s liability limits. If you don’t have enough to cover injuries or property damage you cause, you could face a lawsuit totaling tens of thousands dollars. While “Net worth” may come off as something extravagant, in the case of insurance, it’s an important number for you to keep in mind. Besides, the most important thing about car insurance is having the proper coverage limits for your financial situation.
For example, lets say you hit another car and injure the driver and passenger, your liability limits should be high enough to pay to fix their vehicle and cover their medical bills. If the driver’s vehicle is worth $20,000 and the medical bills hit $40,000 per person, you’re responsible for paying $100,000. And if you don’t have enough insurance to cover all of it, the injured parties can sue you in order to get the money they need to deal with problems you caused. It’s important to remember that car insurance is there to protect your financial security. Getting insurance equal to your net worth means your policy should be able to cover the full cost of an accident without putting your home and other financial assets at risk.
Most insurers do limit the amount of liability coverage you can have, and that limit varies. But if you max out your liability insurance and still want more coverage, some insurers sell umbrella insurance polices which add additional liability coverage for your car and home, often in $1 million increments. However, If you don’t have any assets to protect besides your car, you can usually get away with purchasing minimal liability coverage.
How can I save the most money on my car insurance?
While it’s a good (and smart) idea to have sufficient car insurance, there’s no doubt that it adds to the expense of driving. However, premiums can vary by hundreds of dollars depending on a number of factors. Always review your auto insurance policy come renewal time to make sure your insurance is in line with your needs, and follow these steps to help reduce your premium on your policy:
- Shop around for car insurance: Since prices differ from company to company, it is a good idea to shop around and get at least three quotes, from different insurance companies either through their own agents, or through independent agents. It also helps to do your part by researching the company beforehand as well as asking your friends and relatives for their recommendations based on their testimonials. Any agent you speak to should take the time to answer any questions to your satisfaction, as these are the same people you’ll rely on if the worst happens and you need to make a claim. Your state insurance department or online consumer information sites can help provide information on any consumer complaints by company to better help you choose a reputable insurance company for your needs.
- Compare insurance costs before buying a car: Auto premiums are based on the car’s price, the cost to repair it, its overall safety record and the likelihood of theft. Many insurers do offer discounts for features that reduces risk of theft or personal injuries, or for cars that are known to be safe. When comparing new or used vehicles to buy, do your research to get an idea on what each vehicle will cost to insure. You can also check safety rankings for specific models with the Insurance Institute for Highway Safety’s (IIHS) online Top Safety Pick ratings tool.
- Raise your deductible: Choosing a higher deductible on your car insurance can help significantly lower your premium. However, make sure you have enough money on hand to pay the higher deductible whenever you have a claim.
- Reduce/Remove optional insurance on older vehicles: If your car is worth less than 10 times the premium, certain coverages such as collision and/or comprehensive may not be cost effective. Check the value of your vehicle by looking up what is worth for free on websites like Kelley Blue Book, National Association of Auto Dealers (NADA), and TrueCar to determine whether or not having collision and/or comprehensive coverage is right for you.
- Bundle your insurance and/or stick with the same company: Many insurers offer a discount if you purchase more than one type of insurance from them (like homeowners and auto) or have multiple vehicles insured. Some companies also offer a price break to longtime customers. Always compare costs for a multi-policy discount from a single insurer versus buying your insurance separately from different insurers.
- Maintain good credit: Depending on the state you reside in, establishing a strong credit history has its benefits, including cheaper insurance rates. Many insurers use credit information to price auto policies. (studies shows that people who manage their credit better make less claims). To be sure you’re getting the credit score you deserve, it might be a good idea to check your credit record often to be sure all information is accurate.
- Take advantage of discounts: Always ask your insurer what discounts you qualify for, as they help in bringing down the price (companies that offer few discounts may still be able to give you a lower price). Some companies offer discounts to motorists who drive less than the average number of miles per year or to drivers who carpool to work. Insurers may also offer additional discounts to policyholders. Such as discounts to those who haven’t had any accidents or moving violations during a specified period of time, or those who have taken a defensive driving course. If there is a young driver on your policy who is a good student, has taken a drivers education course or is away at college without a vehicle, you may also qualify for a lower rate.
What is rental car insurance?
A separate coverage offered by a rental agency provides that offers protection for you when you rent a car. This policy usually overlaps in most instances with your personal auto policy, providing equivalent coverage for a rental car as long as its used for personal purposes. Lets say if you have comprehensive and collision insurance, your rental car will most likely be covered if it’s damaged, stolen or totaled, as long as the rental is of similar value to your own vehicle. Your deductible, a predetermined amount subtracted from the claim payout, will apply if you file a claim with your insurer. The same goes with Liability insurance that pays for injuries or property damage you cause to others in a crash, up to your policy limits. Your own injuries and any damage to your rental car aren’t covered.
Below are the typical insurance options from rental car companies:
- Crashes and car theft: A loss-damage waiver (LDW), also known as collision damage waiver (CDW). Although it acts more as a waiver than an insurance policy, it basically means that the rental car company won’t come after you in the event there’s damage to the rental vehicle or theft of the car. Good for when you don’t have comprehensive and collision on your regular policy, or renting in an area where this coverage isn’t in effect. Otherwise the rental company will go after you for any damages.
- Damage you do to others: Supplemental liability protection pays for damages you do to others’ vehicles or property. These limits usually range from $300,000 to $1 million. Highly recommended If you don’t have auto insurance (say if you don’t own a car), or traveling in a country where your auto policy doesn’t offer coverage.
- Injuries to you: Personal accident insurance covers medical costs for both you and your passengers if you’re involved in an accident. This coverage includes ambulance, medical care and death benefits.
- Your stolen stuff: Personal effects coverage pays for your belongings if they’re stolen from the rental vehicle, up to a set dollar amount.
Does my credit score influence my auto rates?
Yes, your credit score does effect your car insurance rates. The majority of insurance companies use credit scores as part of how they determine what you pay for coverage. While four states (namely: California, Hawaii, Massachusetts and Michigan) don’t allow insurers to use your credit report to determine rates and therefore don’t matter. Having a higher credit score decreases your car insurance premium with most insurance companies in most states. Getting an auto quote doesn’t affect credit.
Known as a FICO score, there are five factors that make up your credit score. All these factors are related to your borrowing history and current debt situation:
- Payment history: 35%
- Amount owed: 30%
- Length of credit history: 15%
- Different credit types: 10%
- New credit: 10%
The credit score ranges from 300 to 850. Insurers usually divide these scores into several tiers:
| Tier | FICO Score |
|---|---|
| Excellent | 800-850 |
| Very good | 740-799 |
| Good | 670-739 |
| Fair | 580-669 |
| Poor | 300-579 |
However, a credit-based insurance score alone doesn’t measure how creditworthy you are. Instead, Insurance companies use your full credit report to determine an “insurance score.” This measures how risky you are from a claims perspective, based on your creditworthiness.
You could also pay more for insurance if you don’t have a credit history. In the Insurers eyes, this is often the same thing as having poor credit. Although some states, (like New Jersey and Rhode Island), don’t allow companies to charge you more for a lack of credit history. So, in those cases, you may be better off with no credit rather than having a poor credit score.
Home
What are the differences between homeowners and renters insurance?
A homeowners insurance policy is for the homes owner. The insurance amount usually covers the cost to replace the home in the event of a total loss and any personal property in it like: furniture, appliances, clothing, jewelry, and dishes. For example, lets say a home costs roughly $200,000 to rebuild and the items inside cost roughly $150,000 to replace, a homeowner who wants to cover everything would need to insure at least $350,000 to protect their property and their belongings.
While Renter’s insurance is for tenants who don’t own the property but still want to protect their belongings that are in or on the property. It’s important for renters to understand that the property owner’s insurance will not cover them and their items if they are damaged or destroyed. Renter’s insurance policies reimburses a renter for the replacement cost of property that is lost or damaged while on the property. This can also extend to transportation means, covering items stolen from your vehicle or a bike stolen while you’re working.
What are the differences between vacation home and vacant home insurance?
Vacation home insurance usually provide the same coverages as the policy on your primary home. These coverages include:
- Dwelling coverage – This protects the home’s structure.
- Other structures coverage – Covers structures that aren’t attached to your home like a detached garage or tool shed,
- Personal property coverage, personal liability coverage – Just like your principal residence, this covers potential damage caused by fire, storms, water, and any other acts of nature. However, sometimes some vacation home policies only cover specific perils named in the policy. In those cases, any damage that does occur will not be covered.
Vacant home insurance is ideal if you travel for multiple weeks, own another home for seasonal living, or rent out a second home but are in between tenants.
Either way, the rates for these insurance policies may be higher due to being considered a higher-risk property than your primary residence. There are many reasons second vacation home/vacant home costs are higher and thus are deemed riskier, such as:
Burglary: Vacant or unoccupied homes tend to be more frequently targeted by intruders than occupied homes, which makes it riskier for your insurance company to insure.
Undetected hazards: Homes that are unoccupied are more prone to damage such as leaks, burst water pipes, fires, and undetected mold.
Location: The location can also impact the rates for vacation homes. Often times, vacation homes are located in higher-risk areas, such as near there beach where damage like flooding and hurricanes can occur, or in more remote, heavily forested areas where forest fires can be a problem. While Off the grid homes without utilities don’t require special insurance, it may still be risky for insurers to insure.
How to compare Home insurance policies?
Whether you’re working with an agent or on your own, plan to get at least three quotes. That way, you can feel confident you’re getting a good price. When comparing quotes, check that each policy has similar deductibles and coverage limits. Here are a few issues to look out for:
How much dwelling coverage do I have? This coverage limit should be the amount it would cost to rebuild your home after a disaster. (This amount isn’t always the same as the home’s market value). Although Most insurance companies will suggest a certain amount of coverage based on the specific features of your home, you can choose a higher or lower amount. Because each insurer has a different way to calculate a home’s replacement cost, it can be tricky to figure out which dwelling coverage limit is most accurate.
If you’re not sure how much coverage you need, ask about extended replacement coverage. This offers a set percentage above your dwelling coverage limit just in case your insured amount falls short. For example, lets say your home has a $200,000 dwelling limit but is covered up to 125% with extended replacement coverage. So you’d have up to $250,000 to rebuild your home if you needed it.
How are my belongings covered? Your personal property may be covered with either actual cash value or spend a little more for replacement cost coverage to have your claim payout be large enough to buy newer versions of the stuff you had.
Is there enough liability coverage? Personal liability insurance is the coverage that pays the cost to defend you if someone either sues you or files a claim against you. Lets Say your dog bites someone at the park or a neighbor’s child is injured on your trampoline. Liability insurance pays their medical expenses should they file a claim against you. If they do sue you, this insurance will cover your attorney fees and pay any legal damages.
Consider getting at minimum enough liability insurance to protect the value of your financial assets such as your home, bank accounts and your investments. You can always choose a higher amount especially if your lifestyle puts you at greater risk of getting sued (for example: owning a swimming pool or trampoline or you participate in risky activities such as hunting or skiing).
What are the deductibles? A homeowners insurance deductible is the claim amount you’re responsible for. So lets say you have a $1,000 deductible and a fallen tree does $10,000 worth of damage to your roof, the insurance company’s claim payout would be $9,000, and you would be liable for the remaining $1,000. The higher this deductible is, the lower your premium is likely to be.
Depending on where you live, your insurance company can also charge a separate deductible for certain types of claims such as those from hurricanes or windstorms. For example, say you have a $1,000 deductible for most disasters but a 3% hurricane deductible. If a house has $300,000 of dwelling coverage, you would pay for $9,000 of hurricane damage before your policy kicks in.
Always be sure you’re comfortable with the deductibles on your policy before you buy it. If you don’t have enough money to put aside towards a high deductible, its better to choose a lower one than no deductible.
How is a Homeowners premium calculated?
Insurers calculate the premium using a variety of methods such by area and risk exposure (the amount of risk insurers are taking). Here is the following process insurance companies use to calculate home insurance premiums:
1) If an insurer wants to set a premium for a group of homeowners, it will first divide the losses associated with that group based on its exposure. So lets say during the previous year, the losses for properties valued at $100 million totaled $500,000, the result would be 5% or five cents per every dollar of property value, just for the insurer to cover their losses (what is paid out in claims.) This figure is known as a pure premium.
2) Next, the insurance companies determine their administrative and other costs, such as commissions paid to agents, maintaining its office buildings, paying their staff and even their taxes. It then builds in its desired profit to set how much the company needs to make after paying all of the costs associated with doing business. This is usually expressed as a percentage called a expense ratio.
3. Finally, Insurers calculate the pure premium with the expense ratio to get the gross premium. That’s sort of a base rate for home insurance in your area. At that point, that premium will be adjusted based on personal factors, such as your credit score, claims history and the type of dog breed you own.
You can also come up with your own estimate using a basic premium formula. To do this, multiply your home’s square footage by the cost to rebuild it to determine how much dwelling coverage you’ll need. For example, let’s say your home is about 2000 square feet and the average cost to build per square foot is $150 (the cost varies depending on location, type of home, etc.) So, if you multiply 2000 by $150, you would need at least $300,000 in dwelling coverage.
Insurers also weigh the home premium by these common factors:
- Replacement cost: The more expensive a house is, the higher the premium to cover its replacement cost.
- Age: Newer homes tend to be cheaper to insure than older houses.
- Square footage: The more square footage a home has, the more expensive it is to rebuild which translates to a higher premium.
- Number of primary inhabitants: Larger families residing in the property increases the homes liability.
- Types of construction materials: Fire-safe materials like masonry are cheaper to insure than regular wood.
- Type of roof: Fire retardant materials such as asphalt or metal is preferable to wood shakes
- PPC (Public Protection Classification): Measures the proximity of fire stations, police, hydrants, etc on a scale of 1 to 10. The lower the number, the better the premium will be.
- Area’s claim history: If your neighbors file claims often, your rates can increase.
- Personal claim history: If you file claims often, your rates will be higher.
- Pets: Dogs with a history of biting or breeds considered more dangerous can increase your rates.
- Credit score: Home owners with lower scores tend to file more claims.
- C.L.U.E. report of the property: Lists claims filed by the previous owners including any claims you filed. If the cause of the claims were not resolved, your rates will be higher.
- Security or other alarm system: Installing alarms and monitoring services can help decrease rates.
- Deadbolt locks
- Area’s crime rate: Higher crime areas translates to higher insurance rates.
- Other nuisances: having pools, ponds, machinery, playground equipment, trampolines, etc can increase liability potential and insurance premiums.
Different companies might not rate your Pitbull or neighborhood the same way, so its always a good idea to check with multiple insurers to help you pay less for your coverage.
Boat
What is boat insurance?
Similar to car insurance, boat insurance protects you financially from injuries or damage you cause to others while boating. this insurance can also cover your watercraft and trailer if it gets stolen or physically damaged. Additional coverages, such as uninsured/underinsured boater, gives you even more protection on the water.
Some states like Arkansas or Utah, require you to get boat insurance for most types of boats. Boat insurance may also be required if you’re financing your watercraft, or if you’re docking your boat at a marina. Even if boat insurance isn’t legally required, it can help protect your investment, which helps pay for not only damages to your boat, but any damages or injuries you cause to others as well.
One of the biggest myths about boat insurance is that you don’t need it because its already covered under your homeowners insurance policy. While its true a home’s insurance policy may provide some protection, this protection only applies for smaller boats while its on your property and usually isn’t adequate coverage especially if you’re on the water.
What factors determine my boat premium?
Due to the complicated risk inherent in owning and operating a boat, coverage options, and insurance rates can vary significantly from one insurer to the next. Some variables like, navigation area, storage location, ownership experience, claim history, and motor vehicle record are some examples that help determine your coverage needs. In other words, each company uses their own combination of these factors to help determine whether you are high or low risk.
To get the most out of your boat insurance, (and the most savings), it’s important to understand how these variables can affect you and more importantly, what to ask for while getting a quote. The following is a list of discounts that could be applied to your policy:
- Automatic Fire Extinguisher System – Installing an automatic fire suppression system or other prevention systems can help you save on your annual premium.
- Additional Safety Equipment – Having additional safety equipment like EPIRBs, GPS systems, Depth Finders, or Radar on board can also help you save as well.
- Boating Education Course – If you hold a current boating safety course certificate from the US Power Squadron or the USCG Auxiliary, you are qualified to earn a five or ten percent discount. These discounts can also extend to state courses, as long as they’re approved by the National Association of State Boating Law Administrators (NASBLA) and recognized by the US Coast Guard.
- Boat Currently Insured – Some companies will give you a credit for having and maintaining boat coverage.
- Coverage Choice – Choosing higher limits of coverage, such as higher liability coverage, will increase your rate. In contrast, choosing a higher deductible will lower your rate.
- Clean Driving Record – Just like operating a vehicle safely, safely operating a boat can potentially earn you another discount.
- Diesel Engines – If your boat is powered by diesel, it can help you save on the cost of your Physical Damage coverage.
- Married – In the eyes of some insurers, married couples is a positive factor and can result in a cheaper rate. There are also some insurers that do not take your marital status into account.
- Multi-Policy Discount – Most companies offer additional credits for bundling your boat with your homeowners and/or auto policy, also known as a Multi-Policy Discount. While this is a popular option, keep in mind that multi-line companies are usually not specialized when it comes to boat insurance. Discount aside, you could be missing out on other benefits by working with an agent who is unfamiliar with boats.
- Navigation – Depending on where you plan to use your boat can greatly affect your insurance rate. If you live in coastal regions like for example Florida, you are well aware of this fact. Areas with coastal exposure tend to be considered high risk and therefore have higher rates. Whereas inland boaters are considered low risk insurers, so lower rates apply. Navigation limits are another variable that varies between insurers; the size and power of the boat can also be a factor. Some companies use broad navigation limits like “Inland and Coastal Regions of the United States,” while others have more specific limits. A separate one-trip or yearly “rider” can also be applied for those who want to temporarily extend these limits and travel to places such as the Bahamas and Mexico.
- New Boat– The newer the boat, the higher the discount.
- No Prior Claims – Having a safe boating record is important in getting the best possible rate. There are some companies that do not differentiate at-fault and no-fault claims, so talk to your agent to help you point out which companies do.
- Outboard Motors – These are easier to maintain and repair, so they can potentially warrant discounts. However, this can depend on the number of motors.
- Owner’s Age – With boat insurance, the older you are the better your rate!
- Owning a Home – Home ownership can be a positive factor and may result in lower rates.
- Previous Boats Owned – Being able to operate a 20 foot bow rider doesn’t mean you can safely operate a 45 foot yacht. In fact, many companies require comparable boat ownership history before insuring your newest vessel. Especially if your newest vessel is a larger boat.
- Speed– While many companies surcharge or refuse to insure boats that are too fast, others may give credits for boats that have a maximum speed of 25 to 35 mph.
- Years of Boating Experience – Along with age, the years of actual boating experience you have can positively effect your rate.
Life
What is the difference between term life and whole/permanent life?
Term life insurance is the most flexible and affordable type of life insurance coverage for the majority of families due to its customizable term lengths of 10, 15, 20, and 30 years. This policy only provides cash value in the case of your death and serves as a financial cushion during the years you and your family need it the most, like while you’re paying off a mortgage or providing for children who depend on your income.
Compared to whole life, rates for term life insurance are much lower. Once you buy life insurance, your premiums will also stay the same for the duration of the policy, even if you develop a health condition during the policy period. However, if your policy ends and you need more coverage, the premiums will be higher.
Whole life insurance is the most common type of permanent life insurance, known for consistent premiums, death benefits and ability to build cash value. This policy generally starts to build cash value several years into the policy and can even pay dividends that can be reinvested into the policy to increase its death benefit.
However, whole life premiums are much higher than term life premiums for the same amount of coverage. Before choosing your plan, consider if the availability of cash during the term is worth the extra monthly cost. This policy also doesn’t have a flexible term length option unlike term life which you may end up paying for more coverage than what you need especially if you only need it during a certain period of time.
What factors determine my life insurance premium?
- Gender – On average, women usually pay less than men for life insurance.
- Age – This reflects life expectancy. The longer you’ll be able to pay premiums, the lower your life insurance premiums will be.
- Your health history – Your past and current health history includes factors such as blood pressure, weight, cholesterol, sleep apnea and diseases.
- Family’s health history – Certain medical conditions among your family members is a factor in life insurance rates.
- Tobacco use – Rates for smokers and other nicotine users are generally higher.
- Driving record – DUI and other reckless driving convictions, or suspended or revoked licenses, will lead to higher rates.
- Criminal record – Felonies can result in higher rates or application denial.
- Financial health – Recent bankruptcies can affect life insurance approval and rates. Some insurers may also use credit history as an additional factor life insurance rates.
- Occupation and/or hobbies – Jobs that involve hazardous duties, or dangerous hobbies such as scuba diving and piloting planes are typically a factor.
- Policy type and coverage amount – Policies with longer terms and higher coverage amounts tend to be more expensive.
I get life insurance through my job, do I still need an individual life policy?
Employer-provided life insurance is group term life insurance that may be offered as part of your employee benefits package. If available, it is an option for all of a company’s employees. A regular term life provides a death benefit for the insured’s beneficiary, remaining in effect for a specific length of time. With an employer-provided term life , that time period is while an employee remains employed by the company. The amount of coverage is mainly determined by either using a multiple of an employee’s annual salary, or to the employees position at the company. Employers usually cover most of the premium or all of it.
Your Employer May Not Offer Enough Life Insurance: While the most basic employer-provided life insurance is usually low-cost or free, and may have the ability to buy additional coverage at low rates, the policy’s coverage may not be sufficient enough to fit your needs. Many employers provide employees with about $50,000 to $100,000 worth of coverage, or about a year’s salary. These limits can be insufficient especially if you have any dependents who rely on your income in the event you end up hospitalized or dead. In that case, Some experts recommend getting coverage at least five to 10 times your salary.
On the other hand, if you have no dependents or have an alternative plan for providing for them, your employer’s group life insurance might be enough. You can rely on the group life insurance, for example, to cover funeral expenses or any debts you may have.
You Can Lose Your Coverage If Your Job Situation Changes: Just like health insurance, you want to avoid gaps in your life insurance coverage. If you change jobs, get laid off, or reduced to part-time status, you could lose your employer-provided life insurance.
While Some policies do allow you to convert your group policy to an individual one, it’ll likely be more expensive. Generally, you can find a more cost-efficient insurance policy outside of the employer’s plan. However, if you can no longer get medically underwritten for new insurance, you may want to convert your group policy to an individual one regardless of the price.
Even if you don’t leave your job, not having additional coverage can still be risky due to the possibility that your employer can stop offering life insurance as a benefit.
Getting Coverage Is More Difficult When Your Health Declines: If you leave your job due to a health problem or if your health has greatly declined, you may struggle to get new life insurance because insurers factor in your health when they approve you for a policy. A medial exam is a standard part of the process while applying for most life policies. Meaning you may potentially end up with no coverage just when your family is going to need it the most.
By that point, it may be too late to purchase your own policy at an affordable rate, assuming you can get one at all. Having additional coverage outside your employer’s plan can help minimize the risk that you won’t qualify for coverage when you need it.
Your Plan Doesn’t Provide Enough Coverage for Your Spouse: Your employer’s benefits package may not provide life insurance for your spouse. When it does, this coverage may be minimal. If your current employer-sponsored coverage doesn’t offer a sufficient death benefit for your spouse, you might want to consider purchasing a separate policy.
Employer-Provided Life Insurance May Not Be Your Cheapest Option: Even if you feel that the life insurance coverage from your employer may be sufficient, it’s good to shop around just to make sure your employer’s insurance really offers the best value.
The younger and healthier you are, the more chances at finding a better rate elsewhere. The coverage provided by employers tends to get more expensive as you get older. On the other hand, you could purchase a guaranteed level-premium term life insurance that costs you the same amount every year as long as you have the policy.
How much life insurance do I need?
To quickly determine your existing life insurance needs, using an estimate can be an easy way to get a value. These methods are better than a random guess but they often fail to account for important aspects of your financial life. Using a life insurance calculator can help get a general idea of how much coverage you will need. Once you have a idea on how much coverage you need, use these estimates to compare them:
1) Multiply your income by 10: The “10 times” guideline is often shared online, but it doesn’t usually give an accurate look at your family’s needs, nor does it take into account any savings or existing life insurance policies you may already have. It also doesn’t provide a coverage amount for stay-at-home parents, who should have coverage even if they don’t make an income.
The value of a stay-at-home parent’s work has to be replaced if either he or she dies. At the very least, the remaining parent would have to pay someone to provide services, such as child care, that the stay-at-home parent had provided for free.
2) Buy 10 times your income, plus $100,000 per child for college expenses: This formula adds a second layer to the “10 times income” rule by including additional coverage for your child’s education. While College and other education related expenses are an important component of your life insurance calculation especially if you have kids, this method still doesn’t give you a complete idea of your family’s needs, assets or any active life insurance coverages.
3) Use the DIME formula: This formula gives you a more detailed look at your finances compared to the previous two methods. The four areas that you should account for when calculating your life insurance needs are:
Debt and final expenses: Add up your debts, apart from your mortgage, plus an estimate of your funeral expenses.
Income: Decide for how many years your family would need support, then multiply your annual income by that number.
Mortgage: Calculate the amount you need to pay off the mortgage.
Education: Estimate the cost of sending your kids to school and eventually college.
By adding all of these obligations together, you get a much better view of your needs. However, while this formula is more accurate, it still doesn’t account for any life insurance coverages and savings you may already have. It also doesn’t consider any unpaid contributions a stay-at-home parent makes.
4) Replace your income, and add a cushion: Using this method will help you buy enough coverage that your beneficiaries can replace your income without spending the policies payout. Instead, they can use the payout to save or invest and use the resulting income to pay expenses.
To calculate this amount, divide your annual income by a conservative return rate, such as 4% or 5%. For example, let’s assume your income is $50,000 and you estimate a 5% rate of return. So the math would be: $50,000 divided by 5% which equals $1 million. If you buy a million-dollar policy today and your beneficiaries were to put that payout into a bank account earning a 5% annual interest, they should expect to generate $50,000 a year in order to replace your income. Once your dependents no longer need the income to meet their daily expenses, the $1 million can now go towards goals such as college tuition, buying a home or even a retirement income.
This method can also be used for a stay-at-home parent. To calculate, add up how much it would cost each year to pay someone else to handle that parent’s tasks. Then plug the number into the formula as if it was the stay-at-home parent’s annual income..
Should I wait to buy life insurance?
There are obvious benefits to having life insurance. It pays your dependents when you pass away, but planning for it can be difficult. So when should you buy it? There are a couple scenarios where buying a life insurance policy can come in handy.
You should buy life insurance when you have any dependents who your death may be financially at risk. If that’s the case, you should consider taking out a life insurance policy. That way, they or their caretaker can pay the bills after you’re gone. It might also be helpful to purchase a life policy for these following scenarios.
Before getting married or having kids: This might not make sense at first glance. Why buy life insurance before getting married or having kids? Well, buying a life insurance is cheaper when you’re young and healthy. Life insurance companies are betting on you living through your coverage term. So, they offer better rates to younger, healthy folks who aren’t likely to die while they’re covered. Some insurers even cap the age at which you can buy policies.
You can take advantage of lower rates by locking them in your 20s and 30s, and doing so before you develop a “pre-existing condition.” In other words, it may be worth purchasing a policy now before any health complications arise that might make your life insurance premium more expensive down the line.
After getting married: If your passing would make finances difficult for your spouse, consider taking out a life insurance policy for yourself and designating your spouse as a beneficiary. This can help your partner pay the bills. For example, lets say you pass away while you and your spouse were paying off a mortgage, that policy would help them cover the cost of housing.
Another thing to consider is funeral costs. A nice funeral can be expensive. You could take out a life policy, designate your spouse as the beneficiary, and tell them to use it to cover the funeral costs. It can give both them and you peace of mind.
After having children: Raising kids is no joke. For one thing, raising kids can be expensive. Consider purchasing yourself a life policy and designating either your kids or a spouse as beneficiary. That way, you can continue contributing financially raising your kids in the event you pass away before they come of age.
A life insurance policy can help loved ones pay for:
- Schooling and daycare
- Mortgage payments
- Post-graduate education
After purchasing a home: Co-owners and family members should take out a life insurance policy after buying a home. That way, beneficiaries can still make payments, even if the policyholder can no longer contribute to the monthly mortgage.
After starting a business with partners: It makes sense for surviving business partners to buy out the deceased person’s stake. That way, the deceased’s family can still get paid, and the surviving partners can continue to run the company without interference. Buying a life insurance policy and making partners beneficiaries can provide funding to keep a business alive.