Most people start considering life insurance when they have spouses and families who would be financially devastated if they were no longer bringing home a paycheck. It’s not just about the obvious basics such as mortgage payments and food on the table—but the normal elements of “life-goes-on,” such as children’s allowances, vacations, smartphones, graduations and weddings—and retirement.
To answer a client’s question of, “how much do I need?” several different approaches have emerged. So-called wrongful death lawsuits typically address damages from the standpoint of the dollar amount the surviving family has been deprived based on the economic value of future earnings, and this was the approach taken by the 9/11 Commission in addressing payments made to families of those lost in that disaster. This concept is referred to as human life value. Another approach is to estimate ongoing expenses that aren’t otherwise covered from existing resources—and possibly a surviving spouse’s income—a calculation often referred to as capital needs analysis.
Whichever method is used by the client to determine their protection need, the typical two-earner family income (and expenses) of a combined $150,000 a year could generate an insurance need in excess of $3 million. In fact, a 33-year old professional currently earning $150,000 with anticipated three percent increases over a 42-year work career (“75 is the new 65”) will earn $8.4 million. Income increases averaging 5 percent will push career earnings to over $14.2 million.
Faced with such significant calculations, it’s not unusual for people to start with term insurance for their current protection needs. Then perhaps gradually convert to forms of life insurance designed for lifetime needs and the amount of death benefit desired, no matter how long they live.
Especially when using the human life value approach to determining initial insurance needs, one would assume at the point they are no longer working for a paycheck, their need would have accordingly diminished. Most non-insurance trained financial advisors would concur and recommend the surrender of any remaining policies. Yet there are a number of reasons why life insurance has a place even when they’re living solely on resources accumulated for retirement and used for income distribution.
The following points are helpful in advising your clients.
Moving From Protection To Other Uses
1. From Protection To Investment
Whether term or “permanent” coverage, life insurance starts out providing death benefit protection to the beneficiaries. With policies that rapidly create cash value, there is a transformation from value primarily oriented to protection to―over time―tilting more toward asset accumulation as the balance shifts from net death benefit to cash value. There are those who will criticize this natural result: “there isn’t enough death benefit―most of it is your money!” But that overlooks how life insurance is made affordable as people age. In fact, with a view toward lifetime needs that begin with protection and migrate to asset protection and retirement income distribution, life insurance is a dynamic and almost perfect complement to any investment portfolio.