Income Replacement and Life Insurance
Updated April 2, 2019 . AmFam Team
Your family is the reason you work hard every day. You put the clothes on their backs, the food in their stomachs and you support the things they love to do. Now consider what would happen if you were to pass away. Would your family be able to afford their current standard of living?
That’s why life insurance is so important to have. It’s a way to help replace your income and protect your family if you aren’t around to contribute financially.
Why Should I Buy Life Insurance for Income Replacement?
Think about all the ways you spend your income — car payments, the mortgage, groceries, insurance, new clothes, credit cards — the list goes on. Would your family be able to cover the cost of all these expenses if your income was no longer part of their budget? Income replacement is one of the main reasons many people, especially those who have loved ones depending on them financially, have life insurance. Having life insurance for income replacement means if you pass away, your family could have the financial support they need to maintain the lifestyle they’re used to.
Is My Life Insurance Coverage Through Work Enough?
You may already have life insurance coverage through your employer — but is it actually enough? It depends on what your specific employer offers, but most often employer-provided life insurance doesn’t offer the amount of coverage you actually need.
Say your employer offers you $50,000 to $100,000 of coverage at no cost. This may seem like a lot of money, but if you have a family you’re providing for, you may need much more to replace your income (depending on how long you want your income replaced). And while some employers offer supplemental life insurance coverage at an additional cost, you’re still getting your life insurance from a single source. Which is a problem if you lose or leave your job — since the coverage might not come with you.
That’s why, even if you can get life insurance through work, you should consider adding a policy you purchase and own yourself that will stay with you regardless of where you work.
How Much Life Insurance Do I Need for Income Replacement?
So how much life insurance coverage should you get to replace your income? To get an estimate, take your annual income and multiply it by how many years you want to replace. People often choose five to ten times their annual income. Keep in mind, people with older dependents might not need income replacement as long as those with younger dependents.
Remember, this is just a starting point to help you determine an estimate for income replacement — it doesn’t calculate things like final expenses, your total debt or setting money aside for your children’s college tuition. Your American Family Insurance agent can help you choose life insurance coverage that specifically fits you and your family’s needs.
Term Life Insurance vs Whole Life Insurance
You may have heard of term life insurance and whole life insurance. What are the differences and which is best for you?
Term life insurance
A term life policy stays in effect for a specific term or length of time, often 10-, 15-, 20- and 30-year terms. Level term policies keep the premiums — the amount you pay to keep your coverage in effect — and coverage amount — the amount your beneficiaries will receive if you die while the policy is in effect — the same for the length of term you choose.
Some key distinctions of term life insurance include:
- Lasts for a specific number of years.
- Payout delivered if you die while the policy is in effect.
- Designed with affordability in mind.
Whole life insurance
Whole life insurance is exactly what it sounds like — protection for your whole life. This means you’re guaranteed permanent life insurance coverage and your beneficiaries will receive a death benefit regardless of when you pass away.
Some key distinctions of whole life insurance include:
- Covers you for your entire life.*
- More expensive but coverage comes with more living benefits than term life insurance.
- You’ll accumulate cash value that you can borrow against in the form of a loan.** Some examples of how this could be helpful would be for things like helping with a down payment on a house, college tuition and emergency expenses.
Get a Life Insurance Quote
Ready to take the next step in planning your family’s financial future? Get in touch with an American Family Insurance agent — they’ll help answer any questions about life insurance and income replacement so you get just the right coverage to protect what matters most.
*This is a brief description of coverage and is subject to policy and/or rider terms and conditions which may vary by state. Fixed and guaranteed premiums are statements about the policy as determined at issue, and any changes made to a policy may affect the premium and are subject to our underwriting rules. The words lifetime, lifelong and permanent are subject to policy terms and conditions. Whole life policies mature at age 121. Please check with an American Family agent for details on coverages and restrictions.
** Any loans taken from your life insurance policy will accrue interest. Any outstanding loan balance (loan plus interest) will be deducted from the death benefit at the time of claim or from the cash value at the time of surrender. If the loan balance grows too large for the cash value to support it, the policy could terminate.
Related Articles
- Life Insurance for Children
You understand the importance of providing a secure financial future for your loved ones, and purchasing a life insurance policy on a child (with the ability to transfer ownership of the policy in the future when the child becomes an adult) can help you do just that. Let’s take a look at how a life insurance policy can help you proactively protect your loved one’s financial future.
Why Is Children’s Life Insurance a Good Purchase?
A life insurance policy is a purchase that can last a lifetime. Whether you purchase it on your child or grandchild, there are a number of benefits.
Low premiums
Since the cost of life insurance depends largely on things like age and health, purchasing a life policy when they’re young can lock in a low premium for the entire policy payment term.
Protect their ability to secure life insurance in the future
One of the biggest benefits of buying life insurance on a child is protecting their ability to secure life insurance in the future. When purchasing a permanent life policy on a child, your policy might include (if not, you might have the option to add) a Guaranteed Purchase Option (GPO) benefit to ensure the opportunity to purchase additional life insurance on them at certain ages and life events down the road without a medical examination or proof of health.
Build cash value
A permanent life insurance policy has the ability to accumulate cash value year after year. The earlier you start, the longer cash value can build, so when you purchase a life insurance policy for children when they’re young, the cash value has a lot of time to grow before they may need to use it. And, if ownership has been transferred to the adult child, they can even borrow against their cash value* if needed.
Should I Purchase Permanent Children's Life Insurance?
If you’re purchasing life insurance on a child, most people select permanent life insurance since it is built to last the child’s entire life. A permanent life insurance policy provides not only a death benefit, but, as mentioned before, the policy also has living benefits, like the ability to accumulate cash value.
Purchasing life insurance can be a practical and simple way to help protect your loved ones’ dreams. Check out American Family Life Insurance Company’s DreamSecure Children’s Whole Life permanent life insurance policy to learn more. Or you can also check in with an agent — they’ll be able to answer any questions you may have about children’s life insurance options through American Family Life Insurance Company.
This is a brief description of coverage and is subject to policy and/or rider terms and conditions which may vary by state. Fixed and guaranteed premiums are statements about the policy as determined at issue, and any changes made to a policy may affect the premium and are subject to our underwriting rules. The words lifetime, lifelong and permanent are subject to policy terms and conditions. DreamSecure Whole Life Insurance policies mature at age 121. Please check with an American Family agent for details on coverages and restrictions.
*Any loans taken from your life insurance policy will accrue interest. An outstanding loan balance (loan plus interest) will be deducted from the death benefit at the time of claim or from the cash value if surrendered. If the loan balance grows too large for the cash value to support it, the policy could terminate.
Policy Forms: ICC17-223 WL, Policy Form L-223 (ND) WL, Policy Form L-223 WL, Policy Form ICC17-224 WL, Policy Form L-224 (ND) WL, Policy Form L-224 WL
- The Difference Between Annuities and Life Insurance
What’s the difference between life insurance and annuities? It’s a common question. If you wonder what it takes to secure a financial future for yourself and those you love, it may be one you find yourself asking. And that’s a very good thing.
The bottom line: life insurance can help provide your loved ones with the financial peace of mind they deserve if you were to pass away. Annuities provide a tax-deferred way to grow money and provide an income stream. Both should be considered as part of a long-term financial plan.
Although both share some similarities, the overall purpose of each is very different. Let’s take a quick look.
Life Insurance Helps Protect Their Financial Future
When comparing life insurance and annuities, the biggest difference is that life insurance is designed to help protect against a financial loss for others after your death. Annuities on the other hand help protect you financially while you’re still alive.
Life Insurance helps to financially secure your loved ones’ future, since the death benefit can help with things like replacing your income and meeting important financial needs such as:
- Funeral costs
- Daily living expenses
- Mortgage payments
- College funding
When you purchase life insurance, you aren’t purchasing it for you — it’s really a purchase for the people you want to take care of.
If you want to find the right life insurance for you and your loved ones, American Family Life Insurance Company has the customized options you're looking for. If you want to learn even more life insurance, read up on the specifics of how life insurance works.
Annuities Help Prepare You for the Future
Think of an annuity as a tool that could help meet your retirement needs. The primary purpose of annuities is to create income for you, and this can be done in a few different ways. You can set up payments that last for your entire life, a specific period of time or a combination of both.
There are many potential benefits of annuities. Some include:
- The ability to grow account value on a tax-deferred basis
- The potential for a future income stream that can’t be outlived
- The possibility of a lump sum benefit that can be paid to a surviving spouse
How do annuities work?
You can buy an annuity by giving your insurance company either a single lump sum or making payments over time. The insurance company then invests your money — referred to as a premium or purchase payment — in different ways depending on the type of annuity you select.
You can buy an annuity that begins making payments back to you right away — this is called an immediate annuity — or if you prefer, annuities are available that delay making payments to you for an extended period, sometimes many years.
Start Planning for the Future Today
Life insurance and annuities work in tandem to protect a future for yourself and those you care for. Now that you have a high-level overview, discuss with your agent how these options fit your needs.
Annuities are long-term insurance contracts intended for retirement planning. Annuities are issued by Protective Life Insurance Company located in Nashville, TN, with administrative offices at 2801 Highway 280 South, Birmingham, AL 35223, through a relationship with American Family Brokerage, Inc., 6000 American Parkway, Madison, WI 53783.
- How Often Should You Review Your Life Insurance?
When you think about why buying life insurance is important, you probably think of financially protecting your family and loved ones in your life when you pass away. With life insurance in place, you can help ensure financial support for those that matter most. But have you spent time reviewing your life policy and ensuring it still meets your needs since purchasing it?
We recommend reviewing your life insurance every year. Having the right coverage in place means less for you — and those you care for — to worry about. Because so much can happen in 12 short months, it's important to make sure your policy is right for you and your family today.
To get you started, we’ve put together a list of 9 key reasons why you should review your life insurance policies every year.
- How Cash Value Life Insurance Works
You most likely purchased life insurance for the financial protection it provides your loved ones in the event of your death — but there can be some additional benefits to life insurance. Some life insurance policies, such as DreamSecure Whole Life Insurance offers the opportunity to build “cash value,” otherwise known as a living benefit.
That living benefit is the value in your policy that may be borrowed against or paid out if the policy is surrendered before death.* Let’s take a closer look at how cash value in life insurance works.
