Life insurance pays a benefit amount to the beneficiaries of the policyholder in case of his death. The money is exempted from tax charges and can be used by beneficiaries however they want. The trend of opting life insurance is becoming popular day by day.
Thus, people want to know how life insurance is calculated. We’ve stated a few factors that act as a life insurance calculator to make people aware of what they will encounter once they enter the insurance sector.
What Factors determine the Coverage and Premiums?
Life insurance is calculated based on a few things that define the coverage amount you’ll require and the estimated premiums you’ll have to pay throughout the tenure. Once you have decided the policy, here are a few answers you’ll have to give to help out the life insurance calculator:
- Age: The age of a person is related to the risk assessment. The healthier you are, the better chances at the life you have. Henceforth, people who buy insurance at an early age have to pay lower premiums compared to people in their old age.
The premiums increase each year in a range of about 4.5 to 9% as you age up. The same reason applies here as you get older, and the risk of death increases as well.
- Gender: Gender also determines how much you’ll have to pay for the amount of coverage. Women generally have to pay 30% less than men for a specific death benefit. So, if you are a female, you may have benefits in the life insurance calculator.
- Place of Residence: Each state has its regulations. Therefore, the residence is an important factor in determining the coverage amount. There are certain imposed charges by the state than can increase or decrease the premiums you have to pay.
- Health: Insurance premiums are categorized based on the applicant’s health. An applicant with the best health will have to pay the least premiums. Next comes the category of good health where the applicant has to pay a lot more. The final category contains applicants with average health and has to pay the highest premiums for their life insurance.
- Type of Policy: The type of policy will determine a lot of things. The applicants need to choose between term insurance and whole life insurance. Whole Life insurance is permanent unlike the term insurance and accumulates a component of the cash value that grows with time. The component acts as a gradual investment and is beneficial in long term. However, Whole life policy is recommended to people with a strong financial background as it is quite expensive, almost 10 to 15 times more than term insurance.
Whole Life Insurance is recommended to people that have a depended with no one to look after or have a strong net worth. The policy chosen will then be used in the life insurance calculator.
- Length of the Term: This factor exists in case you are going for the term insurance. The applicants are recommended to choose a term length that coincides with their long-term payments such as college tuition, a loan or debt payment.
The appropriate term length will let the beneficiaries covered in case an unwanted event occurs. However, longer terms cost more because of the risk factor involved. According to a study, a 30-years term is 23% more expensive than a 20-years term.
- Coverage Amount: When you are done deciding all the other options, choosing the coverage amount will be the final step in the life insurance calculator. Researchers generally recommend the applicants to choose the coverage amount that is ten to 15 times their average salary.
If the applicant is unemployed, he can estimate his future income based on his experiences and average salary in the past. He can then decide on an amount that will best suit his needs.
Read more: Benefits of Life Insurance
How much Life Insurance should I decide on?
People generally can’t decide on how much life insurance they need. Either they go for a very big amount and end up abandoning the policy or go for too low that is useless when paid at the end. Therefore, it is very important to know the right amount of amount when calculating life insurance. In most of the cases, the calculation is based on:
Remaining debts, loans and long-term payments
A person has to account for certain things if he wants to know how much financial coverage he needs. The very basic are the monthly expenditures along with active and passive income, unpaid and long-term financial obligations such as mortgage and college fees.
Add them all up and set a rough figure on how many years your family will need to settle in when you are gone. Multiply the two and move on to the next step.
The current assets
Next comes the future assessment and how much you may own by the time your policy ends. If a person has already signed up for an insurance policy or may get benefits on behalf of the government or job such as social security benefits.
Apart from these, if a certain debt will be repaid to you by then. You need to account for all such expenses.
You need to consider the coverage gap as well that is the time that your family will need to settle in after you are gone. You need to think of their lifestyle to be continued as it is and select a death benefit amount.
If you don’t have any idea that how many years your family will need to depend on the coverage amount after you are gone, you need to figure out some facts. Even a rough estimate will be enough for them to last as long as they settle after you’re gone.
The final slope in the life insurance calculator is the estimation of survival years. The death benefit paid is not subjected to any tax laws so you can keep it all. You need to divide it with the monthly income to have an estimate on how many years your family will survive with that coverage.
After you have signed up for a coverage amount, make your family aware of the knowns and unknowns. Guide them on how to use the coverage money when it is paid upfront once you are gone. Using the money all at once would lessen their chances of survival if there’s no other source of income. The coverage is relatively large and if properly invested, it can be converted in a source of income. This way, they’ll have income as well as an investment amount as security.
Which Company to settle on?
The final question in life insurance calculator is which company to choose. When you are aware of all the facts, have a general understanding of the know-how; you can finally move on to decide which life insurance company to choose. The financial protection offered is the same in most of the cases with minor exceptions.
The State regulations restrict them to pay the death benefit upfront to the beneficiaries in case of the policyholder’s death. Some companies have a waiting period of 2 years before you can make any kind of withdrawal.
Some companies have a difference of opinion on accidental deaths and self-inflicted injuries. These are all the noteworthy points you must keep in mind before settling on a company.
In any case, the company that offers the best quote should be one you choose. Every company has a mindset and they have their way of risk assessment. Everyone offers the same thing but how they offer it can be different.
Some company might see you as a potentially safe bet and at the same time, another may find you a great deal of risk.
Henceforth, you need to get around in the insurance sector and have multiple life insurance quotes. You need to go through them and decide on who offers the best. If the company wants to make a safe call, you should too.
Don’t think of what they want, think of what you want and what you can hold in a long term. That is the safe play.
People often find it hectic to go from one company to another. Even the thought of it gets some of them to sigh. In that case, you don’t need to meet representatives from every company. You can just google up some good brokers and set a meet with them.
Independent agents are a good option when you have multiple options. They have vast experiences with companies and know what policy suits their client best.
Unlike the company agents who think more about the company policies and not the client’s needs, independent agents present you with a variety of options to choose from. You don’t need to visit every company to get to know them.
Independent agent brings down the company policies at his desk to accommodate you. The vast experience they hold plays a vital part in the life insurance calculation.