When you apply for life insurance, every company will ask about your annual income because they need to justify the amount of life insurance coverage you’re applying for.
While the purpose of an application might be clear – family protection, juvenile insurance, buy sell or key person – the death benefit must align with your financial situation.
Here is a quick summary of how financial underwriting may effect your life insurance:
Family protection coverage provides income replacement/estate conservation for your spouse and/or children. It’s typically calculated as “multiple of income”. The younger you are, the higher the multiple. Each company has different multiples, so if a life insurance company is limiting you on the amount of coverage you’re seeking, have your agent shop around.
While the primary focus is income when calculating personal insurance needs, net worth may also be considered.
Juvenile Insurance amounts generally range from $10,000 to $50,000 but amounts up to $250,000 are not unusual. If you’re applying for a high amount of coverage on a child, typically the parents and all siblings must carry equal coverage or have a very good reason to justify the amount. The parents financial situation must also support the higher face amounts on the children.
Buy Sell Coverage
Buy-Sell life insurance seeks to preserve existing assets from forced liquidation when a business owner or partner dies. Life insurance companies will need to know the net worth or market value of the business along with each owners’ percentage interest and verification that all owners are either insured or seeking coverage for their proportionate share of the business.
Key Person coverage insures against the loss of a key person’s expertise, skill and revenue producing ability for a business. As with family protection, key person coverage is based on a multiple of income typically ranging from 5-15, depending on your age.
The biggest key in qualifying for a higher death benefit if you’re on the cusp of the underwriting limits is to have your agent draft a “cover letter” explaining how the amount of individual life insurance was derived. If it’s logical, then the underwriter will have no problem approving that amount.
If you have any other questions regarding financial underwriting for life insurance, please don’t hesitate to contact us.