How Much Life Insurance Is Enough?Julie Brooks
Determining the correct amount of life insurance protection remains a mystery to many. Recent studies show that most adults continue to lack adequate amounts of coverage – and close to two-thirds admit to not even having a personal life insurance agent.
A careful planning session that includes a survivor needs analysis is a rarity in the modern financial world.
As a result, millions of Americans shuffle through their daily lives totally clueless as to the potentially disastrous consequences awaiting their loved ones if their life is cut short, which is precisely what happens to approximately 25% of adults before they reach age 65.
How Much Is Enough?
Historically, there have been four “classic” methods for determining survivor needs:
- Multiple-Earnings Method — Measures the life insurance need as a multiple of annual earnings, usually somewhere between four- and eight-times annual salary. This overly simple method is fast and easy to calculate, but also is the least reliable. It completely overlooks important factors such as family size, living expenses and stage of life.
- Capital Needs Analysis Method — Measures the amount of capital (at some appropriate rate of return) necessary to replace the decedent’s income contribution to the family. This method assumes that no capital will be consumed in the process, and the full principal amount will pass on to the heirs indefinitely. While this maximizes the ultimate estate value, it overstates the amount of life insurance needed to replace the lost income.
- Human Life Value Method — Measures the present value of the lost future income stream to dependents at the death of the insured. It may also include an inflation assumption and mortality probabilities. Because it uses the assumption of an ever-growing salary and increasing standard of living into the future, it tends to overstate the life insurance need based on current lifestyles.
- Comprehensive Needs Analysis Method — This method considers immediate cash needs, debt and mortgage cancellation, income replacement, and college funding needs. It integrates important factors such as inflation, time value of money, taxes, existing savings plans and Social Security. Data provided by clients through a comprehensive financial fact finder specific to your client’s needs is used.
Identifying the Price Tags
Part of our job as insurance professionals is to help our clients and prospects identify needs they may have previously overlooked. Insurance Advisors can provide an excellent Financial Analysis Fact Finder to help steer you and your clients through this vitally important process.
Different categories include:
- Life Insurance for Family Needs
- Life Insurance for Business Needs
- Buy/Sell Planning Fact Finder
- Estate Planning Analysis
- Estate Liquidity Fact Finder
- Retirement Planning Needs Analysis
While not every question or category will pertain to any given client, the depth of the fact finding analysis forces both agent and client to consider all potential items that may have relevance to their financial situation. At the end of the process, clients feel a sense of ownership in the process as the assumptions are based on information they provided.
Make sure you’re prepared to help steer your clients through this vitally important process.
Contact Insurance Advisors to learn more about our fact finding tools and how we can help you zero in on the true need for each of your clients.