Life Insurance for Income Replacement

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  • Post last modified:February 8, 2020

Have you been wondering how your family will manage to pay their bills after you’re dead? What plans have you taken or do you plan to take to ensure your family does not suffer after you die?

If your current income is your only asset, then you are in great danger of leaving your family struggling financially.

Life insurance presents the best option to prevent such risks. By taking the right life insurance policies, your family will have enough money to cope after your death.

This way, you’ll have used life insurance for income replacement. This article discusses this topic in detail.

How Important is Income Replacement?

life insurance for income replacementOne of the most common reasons for taking up life insurance policies is to replace income. If you happen to be the sole provider for your family, then you are the best candidate for life insurance.

This is to guard against the risk of your family having to compromise with their lifestyle in the event that you die.

By taking a life insurance policy, your insurer will pay a certain amount of money to your family after you’re dead. This will either be monthly payments or one lump sum payment. This will help your family retain their normal lifestyle.

Why Term Life Insurance is the Best for Income Replacement?

It might prove difficult to talk to your spouse about your intention to purchase life insurance to replace your income. However, it is a conversation that has to be made to ensure your family is able to pay their bills even after you die.

Among the various kinds of policies, term life insurance amounts to the best that can be used to replace your income.

Term life insurance refers to a type of life insurance that requires the insured to pay a certain amount of money each month for a certain period of time.

For example, if the period involved is 10 years, you will have to pay premiums for the 10 years. In the event that you die before the 10 years period elapses, the insurance company will pay your family an amount equivalent to your salary every month.

Term life insurance is not just easy to understand, but also affordable.  The plan allows you to pay an affordable amount each month, thereby, safeguarding your family of the financial risks that could be brought about by your death.

However, this type of insurance is only suitable if you need coverage for a period not exceeding 10 years.

What’s Next After Term Policy Expires?

As this article has discussed, term life insurance is one of the most suitable income protection plans that you can take. However, it is only ideal when taken to cover a few years, say, 10 years before you retire.

The contract terms for a term life insurance are to the effect that beneficiaries be paid in case of death within the stipulated time. The question is; what happens if the term life insurance policy ends before you die?

When the term ends before you die, you cannot make a claim of the monies you contributed as a premium. This will mean that you’ll have lost these monies. However, term life insurance policies are designed in such a way as to allow the insured to convert them into permanent policies.

To be on the safe side, it is important to review your policy each year and convert it to permanent before it expires. This will ensure that your family will be paid in the event of death.

The amount to be paid to beneficiaries will be similar to that which would have been paid on your first policy contract.

Why Buying a Policy from Work is Not the Best Thing?

They are tow option that can be used to buy a life insurance policy. The first one involves buying the policy from an agent and paying the premiums yourself. The second option involves your employer who will take the policy for you and go ahead to pay your premiums each month.

However, there are a lot of reasons why buying your life insurance policy from work will not be the best thing for you.

Some of these reasons are listed below:

Different Employers

Some people will find themselves working with different employers within a short period of time. When you leave a certain employer to go work with another, your previous coverage will have to be canceled. If you take up a new policy with your new employer, such coverage will only work after 3 months of employment.

The Cost of Coverage

When it comes to determining what amount should be paid by each employee in group coverage, the insurer will access your health rating as a group. This means that all employees will pay the same amount regardless of age. This only favors old employees as their premiums are subsidized by their young counterparts.

The Amount Covered is Small

The amount of coverage offered in a group life insurance policy is small. The amount covered will rarely go beyond three times your annual salary. This makes it suitable only for persons intending to use the coverage to cater for their burial expenses. It is not ideal for income replacement.

Changes in Company Policy

There is no law forcing employers to take life insurance policies for their employees. You might be working in a company that offers life insurance, but a change in company policy may stop the program.

When is Employer-Provided Group Life Insurance Best?

As it has been stated in this article, employer-provided group insurance is not the most suitable insurance plan that you could take.

However, in some cases, it can amount to the best insurance plan you could take for income replacement. What are the circumstances that make it ideal?

Take, for example, a person with a terminal illness, like cancer. Or maybe the person has some other serious health complications. This will make it difficult for most insurance companies to accept to give you a life insurance policy.

This is because the risk of death will be too high for such a person. In case the insurance company allows the person to take up a policy, the premium charged on such a person will be high.

In some cases, some companies will totally refuse to give you a policy if they deem the risk of death to be high. When such a situation arises, group insurance provided by your employer could be the only solution to get life insurance for income replacement.

How Much Life Insurance is Needed for Income Replacement?

The whole idea of taking up life insurance for income replacement is to ensure your family remains financially stable after your death.

The question many people fail to answer is; how much life insurance is needed?

Well, this will depend on a number of factors.

Below are some tips that could prove useful in determining the amount of life insurance you’ll need to take.

Well Known Formula

You can use a life insurance calculator to do this. The formula used will help you have an estimate of the amount of money required to replace your income. As a general rule, it is good to work with a figure that is 5 to 10 times bigger than your annual salary.

From the figure you get above, you’ll need to add expenses that would be incurred immediately after your death. These will include funeral and burial expenses. Medical expenses too will have to be added to this figure.

Include Debt

Any debts that you accumulated during your lifetime will have to be added to this figure. This is because your family will have to pay these debts even after you die. These include mortgages, loans on cars, student loans, among many other kinds of loans.


You’ll have to consider the daily expenses that are incurred by your family. These will include basic expenses like food, rent, and clothing. You’ll also have to add other expenses like transportation costs, insurance, and health care.

Your family will be met with some future financial obligations. These include monies spent on kid’s college education. Such long-term financial commitments will have to be considered when determining the required life insurance to replace income.


The final step would be to subtract the figure you get after following the above steps from your savings and other investments you may have. This would help you determine the insurance coverage you’ll need.


Do you really love your family? Then taking up life insurance is the best thing to do so as not to compromise their lifestyle after you die.

With only a small share of your salary each month, you can be rest assured to leave your family well in case you die. This article has shared with you all you need to know about taking up life insurance for income replacement.

This is also meant to take care of future financial commitments, like your children’s college education fees.

Linda Chavez

I'm a burial & senior life insurance expert, independent agent, Founder & CEO of Seniors Life Insurance Finder. I have been working in this sector since 2004 and established my own company in 2014. I have a team of seven members, and we are trying hard to share the knowledge we've gathered. We know how difficult often it is to find an affordable policy. Hence, we are doing our best to help you.