The intention of life insurance is to provide security to dependents when something happens to the primary breadwinner. Beyond the emotion of losing a loved one, it’s time to get logical. Your family needs money until death!
The most basic way to estimate a client’s life insurance needs is the “multiple of income approach.” Simply multiply primary breadwinner’s income by however many years you’ve “predetermined” as a safety net. 10 years is suggested, but essentially, the beneficiary will need money for as long as 30 years after retirement. But, what about other investments and sources of income a person has? Would this specificity in calculating a client’s life insurance needs, not serve your client’s “income lost” more accurately? Use “Human Life Value Approach” or “Capital Needs Analysis,” if you choose to determine the client’s life insurance needs this way.
Steps to “Human Life Value Approach” to Replace Income Lost.
- Future wage increases included, plus bonuses, health insurance, and other benefits: from now until you need, calculate your client’s earnings.
- Next, subtract the insured’s taxes (about 30%) and expenses from the total.
- Then, subtract the interest you expect the money to earn, factoring in inflation.
- Lastly, add the cost of additional benefits provided through employment, like health care, which will need to be replaced when the client dies.
Capital Needs Analysis: The most widely used approach for estimating your client’s life insurance needs, doesn’t just factor in income lost. It calculates future weddings, current assets, final expenses, other income sources and life insurance needs of the survivors, as well. The calculation infers immediate lump-sum cash expenses like debt fulfillment, mortgage payoff, and funeral expenses when utilized.
Consider family members will cover the costs. Funeral costs ($7k+), and burial insurance is needed after getting the social security number, and death certificate for the departed. Prepare them for things like premium payments when budgeting their money, so that they can forever maintain financial strength.
Two Ways Client Will Receive Funds in the Future:
Earnings -Only Approach: Survivors live off only investment earnings, without cashing out the principal value. So, like with any investment vehicle, with less risk, there is more reward. Thus, the death benefit is higher, for funds to be available for the children, even after the surviving spouse, for instance, has passed.
Liquidation Approach: Survivors expunge portion of principal & investment earnings at once, risking insufficient funds for surviving spouse in future. Convenience costs.
You don’t just work for the health insurance industry, with life insurance quotes researched and the ability to get people to buy life insurance. Ponder your role as a significant part of the family when helping your clients with different types of life insurance.
