Guide for Young Professionals Life Insurance Needs
The first question I usually get when someone finds out that I am in the life insurance business is "How much life insurance should I have?" There are several ways one can answer this question, with multiple answers depending on the approach you use.
Most life insurance agents are trained based on the 'Needs Analysis' approach.
The needs approach is a method used to calculate the amount of life insurance that an individual or a family needs to cover their necessities. The needs approach is a function of two variables: how much money is necessary at the time of death to meet obligations and how much future income is needed to sustain the household without falling into poverty. Source: Insuranceopedia
This approach requires a fact finder with a myriad of assumptions (age, income, expense, current savings, retirement age, etc.). They take this information and put it through software program to tell your life insurance shortfall.
Another approach is the multiple of income. If you can earn 5% on your assets, then a death benefit of 20 x income will be enough to fully replace the loss of income at death. You can adjust this figure by current assets to get in the 10 - 15 x income range. This approach is much quicker to calculate, but may not be as accurate or personalized at the needs based approach.
The following, however, is a better way of helping the client decide how much insurance they should have.
How Much Life Insurance do I Need?
In school you learn to never answer a question with a question. When it comes to determining the appropriate amount of life insurance, I feel you should break this rule. I suggest the following question in response to the question of how much life insurance to I need:
If you passed away yesterday, what do you want for your family from a financial perspective? In other words, what lifestyle do you want them to have?
This turns the whole issue of how much life insurance someone needs into how much do you want in order to take care or YOUR family. This gets at the whole point of life insurance. It is not for you, but for the ones you love. If you want your family to have the full impact of your lost earnings power, then you should have 20 x income. If you feel you have enough saved, and they are fully capable of earning a living on their own, perhaps you don't need or want any coverage.
How Much Life Insurance do I Want?
If you start with the lifestyle you want for your family, you can break this down into how much income you want for your family. From there you calculate how much money (or death benefit) it would take to deliver that level of income. You can adjust this number by current savings and also any current insurance you have today.
By using this approach, you will determine the amount of coverage that makes sense for your situation. It is a personalized solution that is tailored for the financial goals you have for you and your family.
Talk to a life insurance professional about the goals you have for you and your family. Make sure the amount of coverage fits your situation and is funded with a policy (or policies). You can also contact Advisor's Resource to discuss your life insurance needs.
About Advisors Resource
Life insurance is a powerful tool that when used properly can improve and protect your client’s financial situation.
Your clients deserve honest advice regarding their existing policies or even policies they need to protect their family or business.
Our mission is to provide trusted advisors with unbiased information and advice regarding life insurance in order to better serve their clients’ needs.
Life insurance may not be your area of expertise. You may want a resource dedicated to your clients’ specific goals and concerns.
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