The Breadwinner’s Guide to Income Protection with Life Insurance

Breadwinner Life Insurance for Income ReplacementIt’s your worst nightmare.

Your spouse, who is the sole breadwinner for your family, has suddenly passed away. You have few assets and little savings. Can you imagine the thoughts going through your head…

“How will I pay the bills? Where will I live?”

The wonderful thing is the financial disaster above can be avoided, having a life insurance policy on your family’s breadwinner.

Quick Article Guide:

1. Does Every Breadwinner Need Life Insurance?
2. How Much Coverage Do I Need?
3. What is the Right Type of Insurance for Income Replacement?
4. Should I Purchase Life Insurance Through My Employer?
5. Can I Buy Insurance if I’m Not Working?
6. How We Can Help You Save Money on Your Life Insurance

… and since we’ve helped protect so many families purchase insurance for this exact purpose, I’ve created this income replacement guide, so you as a consumer, have all the information you need to make a decision about whether or not life insurance is right for you or your family.

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Does Every Breadwinner Need Life Insurance

Before I go any further, it’s worth a mention that life insurance isn’t for everyone. For example, if you don’t have any dependents or any major debts that outweigh your assets, then you probably do not need life insurance coverage.

On the other hand, if you do have dependents and/or significant debts, then the basic rules of life insurance suggest that the primary breadwinner should ALWAYS have enough coverage in place for their dependents to survive.

This doesn’t necessarily mean the life insurance death benefit should make the beneficiary rich or even better off financially than they were before their loved one’s passing. I’m simply referring to the replacement of the breadwinner’s lost income to help continue the established standard of living due to an unexpected departure.

(It is important to note, however, that insuring a non-working spouse can be just as important. A non-working spouse may not receive an income, but they can be a vital contributing part of a functioning family.  Most of these behind the scenes expenses we take for granted.)

How Much Coverage Do I Need?

In order to figure out how much coverage you will need, the general calculation in the life insurance world is to carry anywhere from 5-10 times your annualized income. Some will even call this method the “rule of thumb” in determining your coverage amount.

Use the JRC Life Insurance Calculator to determine your needs.

Of course you should know that age will be factored into this number as well as a multiple of income allowed. The younger you are, the more coverage you will be eligible for.

As we age, the multiplier decreases. For example, someone in their twenties or early thirties can qualify for up to 30 times their annualized income. On the flip side, someone in their sixties or seventies may only qualify for up to 5-10 times their annual income, since they don’t have as long of a working career left. 

Remember, this multiplier method focuses on replacing a percentage of income over a period of time, so the more time you have left to work in your life, the more you can qualify for.

What Are My Financial Needs?

In addition to the “rule of thumb,” you may want to keep these factors in mind in order to assess your financial needs.

  • What percentage of your income needs to be replaced?  (for most people, it’s 50%-80%)
  • How many years will this income need to be replaced?
  • Do you have any debt? (Mortgage, car note, medical bills, etc.)
  • Are you funding college tuition?
  • Final expenses (Burial Policy)
  • What kind of emergency funds will make you feel comfortable?

As you can imagine, this list can go on and on. Everyone’s financial situation varies, and determining the right amount for you can be calculated by using several different methods.

If you speak with ten different advisers, you may get ten different answers. By evaluating what is necessary, your agent can assist you in building an adequate policy to protect for your dependents.

What is the Right Type of Life Insurance for Income Replacement?

Term insurance is the perfect vehicle for income replacement. You can structure your policy length to reflect that of your working years until retirement.

This is also true for the desired amount of coverage when using the “5-10X rule of thumb” method. For instance, let’s say you make $100,000 and plan on retiring in ten years… a policy in the range of $500,000 to $1,000,000 may be suitable if you reasonably expect to make $100,000 per year for the next 10 years. 

Term life insurance is the least expensive way to protect your income for a specific period of time.

Steven Merkel, of Investopedia, defines term insurance as:

Pure insurance protection that pays a predetermined sum if the insured dies during a specified period of time. Upon the death of the primary insured, term life insurance pays the face value of the policy to the named beneficiary. All premiums paid are used to cover the cost of insurance protection.

The term you chose may be 10, 15, 20, and 30 years, but, unless renewed, the insurance coverage ends when the term of the policy expires. Since this is temporary insurance coverage it is the least expensive to acquire, a healthy 35 year old (non-smoker) can typically obtain a 20 year level premium policy with a $250,000 face value, for between $20-$30 per month. Here are the main characteristics of term life insurance:

  • Temporary insurance protection

  • Low cost

  • No cash value

  • Usually renewable

  • Sometimes convertible to permanent life insurance

Should I Purchase this Insurance through My Employer?

This question is commonly asked during open enrollment. Purchasing insurance through your employer can be as easy as signing up.

If you are only looking for a limited amount of coverage, say $250,000 or under, and cost isn’t an issue, this may be a viable option for your situation. With that being said, you should know that group insurance has a fixed average cost associated with their group.

Within the group there will be employees with poor health, those who smoke, and also those which may not qualify for coverage otherwise. If you are a healthy person and you elect coverage through a group plan, chances are you are subsidizing the rates for those not in the best of health.

Most all group plans only allow coverage through your employer while you are still employed. Once you have left your employer, it is most likely your coverage will reside with the employer. Companies that do allow the coverage to continue past employment will come at a charge. 

If this is the case, it is most likely that the company may have been covering some of the associated costs, and once you have moved on, that cost is now your responsibility. I always recommend independently owning your own policy so regardless of what the future may hold, you can rest assured your dependents are protected.

Can I Buy Life Insurance if I’m Not Working?

If you are no longer working but you are still earning an income, chances are you may still be able to financially qualify for some type of coverage.

Sole Income from Social Security

One example of this is if you are retired and living off some type of fixed retirement income, (a pension or social security), you may still be financially eligible to apply for life insurance.

There are several factors that will determine whether you can get coverage, and how much, such as your age and income.  For example, if you are in your sixties or seventies, your coverage may be limited to five to ten times your annual income.

However, if you are requesting more coverage than you think you will qualify, just know that there are exceptions to every rule. It’s worth a conversation with an experienced agent. If more coverage is deemed necessary, our agents may be able to include other factors that can be included into the coverage equation.

Sole Income from Disability or Unemployment

If your main source of income is through collecting unemployment or disability, this can make it more difficult for you to qualify for coverage. If you are presently unemployed, the insurance company may limit the amount of coverage they will approve you on until you are back to work and have a regular income stream to insure.

The insurance company may ask you how long you’ve been unemployed or when you anticipate returning to work. They are going to want to know the occupation or field of work you were in and if you anticipate returning into the same line of work.

If your main source of income is from disability, the underwriter will want to know about your specific disability. They may ask specifically if your disability is mental or physical and if you anticipate returning back to work, or if your disability status is permanent. All these factors are used to determine the amount of coverage that is financially suitable for your income replacement.

How We Can Help You Save Money on your Life Insurance

At JRC Insurance Group we work directly with more than 40 top-rated life insurance companies. By having access to so many companies, we’re able to shop the market, matching our clients with the lowest priced policy available. Most of our clients are able to to save up to 30% on the cost of their coverage.

Our services are free and there is no cost to apply. Give us a call today, toll-free at: 855-247-9555, or request a free quote online. In just a few minutes, you’ll be able to shop dozens of companies to find the best options available.

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Randy is a co-founder and chairman of JRC and he has been in the life insurance industry since 2008. Prior to his insurance career, Randy founded two travel agencies and is an avid supporter of the SDSU Alumni Association. When he's not cheering on the Aztecs, Randy enjoys hosting dinners for friends and family, traveling, and playing keyboard.
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