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Q: What is the general
purpose of life insurance? Q: How much life insurance should an individual own? A: Rough "rules of thumb" suggest an amount
of life insurance equal to 6 to 8 times annual earnings. However,
many factors should be taken into account in determining a more
precise estimate of the amount of life insurance needed. Important
factors include income sources (and amounts) other than salary/earnings,
whether or not the individual is married and, if so, what is
the spouse's earning capacity, the number of individuals who
are financially dependent on the insured, the amount of death
benefits payable from Social Security and from an employer-sponsored
life insurance plan, whether any special life insurance needs
exist (e.g., mortgage repayment, education fund, estate planning
need), etc. It is recommended that a person's insurance advisor
be contacted for a precise calculation of how much life insurance
is needed. Q: How much will it cost? A: The cost for life insurance varies widely depending
on the health and age of the person to be insured and the coverage
amount of the policy. Individuals are rated by their age, health
history and in some cases, by their careers. All other things
being equal, younger people will generally have lower premiums
than older people. The best way to find out how much life insurance
will cost is to get quotes from multiple carriers. Q: What's the difference between term and cash value life insurance? A: Although a difficult question one whose answer will vary depending on circumstances several principles should be followed in addressing this issue. It must first be recognized that in any life insurance purchasing decision, there are at least two basic questions that must be answered: A. "How much life insurance
should I buy?" The question contained in (A) involves an "insurance" decision and the question contained in (B) requires a "financial" decision. The "insurance" question should always be resolved first. For example, the amount of life insurance that you need may be so large that the only way in which this needed amount of insurance can be afforded is through the purchase of term insurance with its lower premium. If your ability (and willingness) to pay life insurance premiums is such that you can afford the desired amount of life insurance under either type of policy, it is then appropriate to consider the "financial" decision which type of policy to buy. Important factors affecting the "financial" decision include your income tax bracket, whether the need for life insurance is short-term or long-term (e.g., 20 years or longer), and the rate of return on alternative investments possessing similar risk.
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