The answer varies upon the individual goals of a client and their family or business. The answer could be simple enough to pay off a mortgage or a more complex number. The primary goal may be that anyone left behind, after death, could continue with the same lifestyle they were accustomed to while the now-departed was living. Does the client need to pay off other liabilities or debts? Pay for burial expenses, or support a non-working spouse? How much money does a dependent need after the death of a client? These are some of the most frequently asked questions an agent must answer.
What is the smallest amount of life insurance someone needs?
An insurance provider may work with clients to provide enough life insurance to cover the cost of a new home should an owner of the home pass away. Minimum coverage is a reasonable solution. When a partner, parent, homeowner, passes away the ability to pay off and own their home can provide the financial security for the remaining owner to have a place to live for the rest of their life. They only need to be financially responsible for day-to-day expenses rather than a 30-year mortgage.
However, you can imagine the loss of a spouse and co-parent creates a heavier financial impact than just paying off a mortgage. What about the education needs of the children? The loss of retirement contributions and all the other asset accumulations that come with a long life.
What should you consider when calculating life insurance coverage?
Taking care of debt and considering income replacement are more robust goals when quantifying need. A more in-depth approach in determining the amount of life insurance coverage considers many factors like expenses and lifestyle goals. This level of planning would work well for advisors that have more detailed conversations with clients. Using a calculator such as the AIG life insurance calculator, an advisor or agent will work with a client to review the immediate costs of a lost loved one and some of the ongoing costs of supporting the surviving family.
Additional Life Insurance Calculators:
- Lincoln Financial Group: At the bottom of the page, there is an easy-to-use simplified needs calculator.
- Principal: Interactive infographic calculator to help clients determine their need for income replacement, debt repayment, and education funding.
- Nationwide: Quick and straightforward tool to calculate basic needs with additional calculation assistance.
It is crucial to add to the conversation on life insurance the immediate expenses of a passing such as probate, funeral, and any outstanding medical expenses. Medical expenses might include maxed out health insurance deductibles. Another consideration can be estate taxes. These expenses are essential to discuss because these numbers can rise to tens of thousands of dollars and generally require payment at the time of service. If there is no cash on hand, the family could quickly accumulate large credit card bills. Debt will add stress to an already stressful situation.
This midrange calculation takes a deeper dive into the costs of education for children and ongoing income needs for the life of the remaining spouse. Additionally, consider Social Security and how much is needed to replace the income of the decedent’s contributions in the long term. People often plan for short-term needs for life insurance, 30-year mortgages, 20-years of raising children, but they far too often do not consider the longer-term impacts on widows and widowers in retirement years.
What considerations are necessary for high-net-worth individuals needing life insurance coverage?
High-net-worth clients require assessing needs that include income replacement, estate taxes, inflation rates, maintaining the standard of living for remaining family members, and even charitable giving. With complex financial planning, advisors use various approaches. Working with estate plans and high-net-worth clients there is not always a one size fits all approach.
For very sophisticated planning and high-net-worth clients, this calculator can be an immensely resourceful tool. This tool takes into consideration numbers such as expected inflation rates and returns on after-tax investments. A financial planner can compile a summary of needs for life insurance utilizing tools and calculators.
When discussing life insurance needs at this level there are other considerations to address. This includes assets versus liabilities, charitable giving aspirations, future income goals, and living expense needs. Assets, ideally, would never need to be sold to support a family income. Liabilities can put a strain on finances, so include those in calculations.
Charitable giving can be a dynamic conversation with clients as it allows an advisor to spend time learning about passions a client may have. Depending on the estate value of a portfolio, charitable giving can also lessen the tax burden to the beneficiaries of an estate. Discuss and review this topic with a tax professional. Tax burdens to a family may vary over time.
Future income may come from various sources depending on what a family possesses. Discussions might include pensions, rental income, and income from a surviving spouse. All living expenses are a drain on this income. Consider details such as insurance expenses (auto, home, etc.), ongoing taxes such as property tax, and even day-to-day bills like phone and electricity.
What is the maximum amount of life insurance someone can obtain?
Textbooks recommend ten to thirty times earning for ages 18-50. Maximum coverage on life insurance considers a few factors. These factors include multiples of income, net worth, and estate tax risk. A client in their 30s has about three decades to retirement. This means up to 25 times their income. Someone who is retired will see the higher end of coverage, perhaps in the range of ten times their retirement income. For those who have reached older ages, a percentage of net worth is considered to validate more necessary coverage in older age. On the ultra-high-end insuring more than 100 million dollars is possible only by spreading the risk between several insurance carriers and the re-insurance market.
It is imperative to take the time to review as much information as possible when advising a client.
EMG Insurance Brokerage can help.
We can help identify the best type of life insurance for your client. You can find out more about life insurance by calling EMG Insurance Brokerage. We know it is essential for advisors to access quality products, expert advice, and cost-effective solutions.
EMG Insurance Brokerage supplies a wealth of support services for the growth of insurance agents. Contact us today and get the help you need to grow your business today.
Elizabeth Kusmider
ekusmider@emgbrokerage.com
Director of Strategic Life Marketing Initiatives
EMG Insurance Brokerage
Direct 713.507.1015
