How much life insurance is enough?

As a farmer, more money passes through your hands each year than goes through a local county official's re-election campaign. So, if something tragic were to happen to you, who would pay those bills to the bank, the equipment manufacturer, and the chemical seed dealer? And, what would it take to settle those accounts in full?

The answer, according to one independent insurance agent, is as much a personal choice as it is a matter of finance.

While some industry experts advocate carrying life insurance policies equal to 10 or 15 times your annual income, Mike Anderson of Anderson Insurance in Indianola, Miss., said, “There is no particular formula to determine exactly how much life insurance you need.”

In today's environment, he said, owning a million dollars or more of life insurance is very common. But, to be truthful, it's never really enough when something happens. You should base your level of coverage on your personal financial goals, which may include your children's education or the desire to provide lifetime income security for your family.

“As a farmer, you should definitely choose a level of coverage that will, at the very minimum, cover your crop and equipment loans, so that if something happens to you mid-season, your family is protected and a fire sale is avoided,” he said.

The first step in determining how much insurance is right for you, Anderson said, is to answer a few simple questions.

  • Is someone, including your local lending official, requiring that you secure a set amount of life insurance in order to obtain a business loan?

  • How much money does it realistically take you to farm each year?

  • Are you married? How many children do you have?

  • What are your concerns for your family if something were to happen to you? Do you want to guarantee your children's education? Do you want to guarantee a lifetime income for your spouse?

  • What is your greatest monetary concern if something happens to you?

Once you've taken the time to answer these questions and now know how much life insurance you want to purchase, the next step is to determine what type of insurance best fits your individual goals.

Selecting a type of insurance, Anderson said, is based on three things: your budget, your comfort level for risk, and your desire to either rent or own your insurance.

“Do you want a return on your money or do you just want pure term insurance?” he asks. “Pure term will always be the most economical coverage available. However, the more expensive permanent coverage policies, including universal life, whole life and variable life, build equity.”

“Each of the insurance products offers its own distinct advantages and disadvantages,” Anderson said. “Some people purchase term policies because they feel like that's all they can afford to spend. Some people have a difficult time saving money, and the whole, universal and variable life policies are a forced savings for them.”

The primary advantage to term life insurance, whether you choose an annual renewal policy or a fixed 20-year policy, is price. “You are getting more bang for the buck because term policies offer the least expensive premiums per $1,000 in coverage,” he said. “The disadvantage to term is that if you outlive the 10- or 20-year period of the term policy and still need the same amount of coverage, it will cost you more.”

Whole life, variable life and universal life policies build cash values that can provide money for future needs. The consumer accepts the risk of cash value growth with the variable life product; the company accepts the risk with whole life and universal life contracts.

With both whole life and universal life policies, the policy's “cash value” is determined by the company, based on either whatever measure the company is using to index the cash value or a minimum guarantee.

And, while the two types of coverage share many of the same characteristics, whole life policies offer a fixed premium, and universal life policies offer some flexibility in premium costs.

“The premium for whole life is generally more expensive, but this type of policy offers stronger guarantees,” Anderson said. “The advantage to universal life coverage is that you can control the amount of premium you pay, as long as you pay the company's minimum premium. However, that's also the disadvantage to universal coverage because it's human nature to pay as little as possible, which can jeopardize your insurance coverage down the road and can cause your premiums to increase.”

In comparison, variable life insurance offers a greater opportunity for “cash value” growth. Along with this opportunity comes risk.

“We can all understand risk as we reflect over the past 18 months,” Anderson said. “Variable means exactly what it said. Your cash value will vary according to your selections of stock market sub-accounts offered by that particular company.”

The only guarantees offered by a variable life insurance policy are the maximum mortality charges and the maximum expenses of the policy.

“In the past few years, this type of coverage has been attractive to those people seeking greater opportunity for growth. There are many people who only want term and then there are those who believe cash value policies are the best. What is comfortable for me, may not be comfortable for you,” Anderson said.

“We've all been told it's better to own a house than to rent because when you own a house you build equity. It is equity that allows us to make a second mortgage when money is needed for education or a new car. If you hadn't built that equity you might not have been able to come up with those extra dollars,” he adds. “Also, if we knew when we were going to die, we would know exactly what coverage to buy. That is why they call it life insurance.”

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