Insurance is a contractual guarantee to help cushion against the financial blow of a costly disaster. But the security it provides is expensive. How can clients know if they have enough insurance, or if they are paying for coverage they don’t need?

Industry experts offer a few insights.

Many Variables
Americans spent some $1.4 trillion on insurance products in 2021, the most recent year available, according to the Insurance Information Institute. That includes medical and auto coverage, which are required in most places. The need for other kinds of protection, though, depends on many variables.

“The first step to determining the appropriate amount of insurance coverage is to do a holistic financial plan, ensuring you understand what someone owns and owes and where they are today and where they want to get to,” said Brett Bernstein, CEO and cofounder of XML Financial Group in Bethesda, Md.

Affordability is important, of course, otherwise clients will let their policies lapse. So it’s important to prioritize goals. These should include saving for retirement, children’s education, and general living expenses, he said.

Some advisors use a multiple of the client’s income, anywhere from five to 20 times annual intake,  to gauge the right level of coverage, said Kelly LaVigne, vice president of consumer insights at Allianz Life in Minneapolis. Others add up their client’s mortgage debt, the cost of college for the children, and any other financial responsibilities, he said. A third option is to calculate the present value of the client’s future income.

“Often, a combination of these classic methods is used to establish how much protection is appropriate,” he said.

Beyond A Financial Calculation
Beyond expenses, consider the client’s age and health, the ages and health of dependent family members, the value of owned property, and all other obligations, said Patrick Currall of Signature Estate & Investment Advisors in Newport Beach, Calif. Once this is measured, he said, “it’s relatively easy to quantify the needed insurance.”

But the reasons for coverage should also be kept in mind. “Insurance is all about risk management,” he said. Clients who are wealthy enough to eat the cost of disasters on their own—known as “self-insuring”—might not need the expense of coverage at all, he said.

Realize, too, that these goals and priorities are not set in stone. “Insurance needs change with time and should be revisited regularly,” said Todd Wolfe, a senior insurance associate at Telemus Capital in Southfield, Mich. “We have no crystal ball to predict the future, but we can evaluate potential outcomes both with and without insurance.”

Life Insurance
Life insurance may be the biggest conundrum. People in their 30s and 40s, who are typically concerned about a mortgage, student debt, and college planning for their children, buy life insurance to protect those interests. But as they get older, “their needs can shift from asset protection to long-term care,” said Rochelle Odesser at Madison Planning Group in White Plains, N.Y.

Even so, clients “don’t necessarily want to cut back on coverage,” she said. “But they will redirect it to meet changing needs. They will reevaluate premiums versus risks.”

“Life insurance may not be necessary when the family has enough assets and independent income that the death of one of the spouses will not put the surviving spouse at financial risk,” said Harold Evensky of Evensky & Katz in Lubbock, Tex. “The most obvious time would be retirement, when the potential loss is not salary income but only Social Security and possibly a pension or annuity.”

Make no mistake: Few clients regret having coverage when they need it. “In many cases, the beneficiary says there wasn’t enough coverage in place,” said Curt Johnston, vice president and wealth advisor at Girard, a Univest Wealth Division, in Souderton, Pa.

Risk Transfer
Philip Chao, principal and CIO at Experiential Wealth in Cabin John, Md., stressed that life insurance is primarily designed to “transfer the risk of dying too soon. It should not be emotional.”

As people age and their commitments or debts lessen, he said, the need to transfer that risk might well be reduced.

Nevertheless, for many clients life insurance works to “provide the family with peace of mind and security in the event of an untimely loss of the primary breadwinner,” noted Ken Roban and Nick Fiegoli of Reservoir Road Wealth Management at Steward Partners Global Advisory in New York City in a joint email.

Even if the client no longer has a mortgage or dependent children, they added, life insurance can still serve a purpose. “Many of our clients who have accumulated large estates use life insurance as a tool to help preserve what they have worked so hard to build,” they explained.

When Is It Too Much
Still, there are clients who hang onto excess coverage the way some people have too many umbrellas. It gives them peace of mind.

“I have seen clients pay for policies that should have lapsed many years ago, because they were afraid to lose the death benefit,” said Girard’s Johnston. “Some clients have paid total premiums that add up to way more than the face amount of the policy.”

Yet they should not cut back for the wrong reasons. “Life insurance is generally an investment for the client’s beneficiaries, not for the client,” said Steve Oshins, an estate planning attorney in Las Vegas.

Clients, he said, often become impatient to see a payoff from the premiums they put in, even though that’s impossible in their lifetime. “They sometimes psychologically have trouble with their insurance choice,” he explained, “and let the policy lapse out of frustration.”

An estate planning attorney should be consulted before life insurance is reduced or let go, he cautioned.

Long-Term Care
As clients age, long-term care (LTC) insurance becomes increasingly important. But it’s easier to qualify when you’re young and still healthy—years before you’re likely to tap into it.

“Quantifying the risk for LTC isn’t as straightforward as it can be for most insurance solutions, and perhaps that explains why countless surveys indicate advisors need to do more to help their clients plan for this eventuality,” said Mike Padawer, founder and president of INERTIA / Advisor Services Group in Clearwater, Fla.

Calculating a person’s likely need for daily assistance with basic tasks, including the different ways that care might be delivered—in an institution or at home, say, and for how long—is “fundamental to LTC planning,” he said.

Many clients prefer hybrid policies that link LTC benefits to life insurance—so that, one way or another, they are assured of receiving something back for their money.

Another essential consideration is property insurance. Homeowner policies are increasingly difficult if not impossible to get, particularly in regions of the country ravaged by storms or wildfires. Last year, average premiums for home insurance renewals jumped 20%, according to industry estimates.

“We typically ask our clients to periodically evaluate their insurable property and consider obtaining appraisals,” said F. Michael Zovistoski, a managing director at UHY Advisors NY in Albany, N.Y. “Our recommendation is always to insure the property for replacement value or appraised value.”

Nonetheless, some clients go overboard, he shares. “It becomes a security blanket,” said Zovistoski.

If he recommends cutting back, clients feel “separation anxiety,” he said.

Jay Freeberg, an advisor at Onyx Bridge Wealth Group in Boca Raton, Fla., said it’s always important to discuss “alternative uses of [clients’] funds.” Especially as their financial picture becomes more stable and their obligations shrink, don’t let them overlook “the cost of insurance and how it fits into their budget,” he said. “Many times, [clients choose] to enjoy their life and retirement now.”