Offers Consumers a Quick Way to See How Much Term Life Insurance They Need

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The biggest mistake consumers make when buying term life insurance is not buying enough coverage. The second mistake is paying too much for the coverage that they do buy.

Financial advisors need to take more time to explain what happens to a lump sum of money if it is paid out year by year over a long period of time.

The free web site provides an "Income Replacement Calculator" to help consumers determine how much term life insurance is enough to buy. Once a consumer knows how much coverage they need, allows the consumer to shop from over 125 life insurance companies to find the best prices for term life insurance. The service is provided without cost or obligation and it's done without consumers having to identify who they are.

The calculator is a simple tool that consumers need to take a close look at. Term4Sale, Inc. president Bob Barney argues that surviving spouses receiving a death benefit don't care what kind of policy it was or how much it cost; they want to know how much money they're getting. The question is whether the family will have enough money to continue doing what they were doing before their loved one died. If their loved one was bringing home a paycheck, then the financial loss is serious.

Replacing a paycheck is the logic behind the Income Replacement Calculator. If there is a way for the family to keep getting the same paycheck, for as long as they need it, the problem is solved.    

To use the calculator there are only a couple of questions consumers need to answer:

1. How big does the paycheck have to be?

2. How long will it be needed?

The second question is tougher than the first. The least amount of time that most families need a paycheck is until their children are adults and able to fend for themselves. If the youngest child is 5 years old, and they plan to go to college, a paycheck will be needed for at least 20 years.

The amount of the paycheck isn't too difficult. If your paycheck is currently $50,000 per year, use that number. You may want to cut the amount back to take into account that the family no longer needs to feed and clothe you but you should assume that the family needs most of what you were earning. How much insurance is needed in order to give a family $45,000 per year for 20 years? Based upon 3% inflation and 6% interest, comes up with $694,000.

Many people are shocked by a number that big but consumers need to look closely at the year by year illustration which provides. Each year a paycheck is taken leaving a balance that is invested. At the beginning of the next year the income is again taken (indexed to inflation) and interest is added to the money left over. The process goes on each year until the 20th year when the last withdrawal wipes out the remaining money. While $694,000 shocks many, the bigger shock is to see all the money gone at the end of 20 years.

Before consumers panic they need to realize that $694,000 of term life insurance is not that expensive. A 35 year old male non-smoker, depending on their health, can expect to pay an annual premium of between $350 (exceptional health) and $700 (regular health) for a fully guaranteed 20 year term insurance policy. That's somewhere between $30 and $60 per month. Barney suspects that most 35 year old life insurance buyers are paying far more than that and yet do not have that much life insurance.    

When asked who is responsible for the problem, Barney blames the life insurance industry first. He says that most agents prefer selling expensive whole life policies which pay higher commissions. To accomplish that they use calculations that come up with smaller numbers. Barney said, "A 35 year old needing $694,000 of life insurance won't be able to afford it if they buy whole life. In order to sell the whole life policy the agent must come up with an insurance number that's much smaller. The problem is that the family ends up short changed if the breadwinner dies."

Barney is also critical of many of the financial gurus that like term life insurance. Many recommend that consumers need 5 to 7 times their income in life insurance. That's a number far too small for younger families. He believes consumers will buy the right amount if it is explained properly.

"Financial advisors need to take more time to explain what happens to a lump sum of money if it is paid out year by year over a long period of time." Barney added, "The consumer planning how much lump sum money his dependents will need, in order to have an income if he or she dies, is dealing with the exact same problem that people planning for retirement must solve. Whether you die or retire the paycheck stops. It is a lump sum of money, paid out over a number of years, which solves the problem. If a financial advisor explains it properly they'll find that they are killing two birds with one stone."


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Robert Barney
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