You recognize the need for life insurance, but two important questions remain:

How much coverage do you need?

What information is needed to justify the amount of coverage?

Depending on the reason you are applying for life insurance, there are several ways to determine the amount of coverage you need. Family income protection is one of the main reasons people apply for life insurance. In order to assess your life insurance need, the insurer will need to know your age and income at the time of the application.

One simple and common method is to calculate coverage as a multiple of annual income. Remember that your income means your TOTAL income, which may include more than just salary – bonuses, commissions, deferred compensation – but NOT investment income.

A good place to start is this formula:

Ages 20-30  ̶  20x income

31-40   ̶   16x income

41-50   ̶  13x income

51-60   ̶  10x income

61+   ̶   5x income

Underwriters often request information to ensure the coverage amount is both reasonable and affordable. The most common information requested includes tax documents, pay stubs and financial statements. The insurer may also ask for information on existing policies. The insurer wants to confirm you are not overinsured and at risk of lapsing for nonpayment.

You can reduce your stress by gathering this critical information and having it ready for your interview. Don’t panic; adverse financial history does not have to be an issue if you can explain it.

Be prepared to address questions the underwriter may have about your insurability, including:

• income
• net worth
• bankruptcy
• lawsuits
• liens
• judgments
• spousal employment

If you have existing life insurance, you’ll need to know the carrier, benefit amount and whether you have been declined for insurance before or had coverage canceled.

All of this information will allow an underwriter to determine whether the amount of coverage you are applying for is appropriate. If an agent can thoroughly explain financial history and justify the amount of coverage in a cover letter at the time of application, sometimes further information is not needed.

Not every case is the same; documenting your financial information can answer an underwriter’s questions, making financial underwriting a simple and painless process.

More information about the life insurance application process is available in our earlier blog and at Life Happens, an industry website.