Life Insurance for Consultants

Michael Kelly, CFA, CFP®

Deciding that you need life insurance to protect your family is a big decision that can be tough to address. It’s also a decision that leads to more questions that you have to answer before this item is off your to-do list. You have to make choices around the type of insurance that best suits your needs and how much you need to purchase.

Is More Life Insurance Always Better?

One common mindset is “buy as much as I can”. This idea helps us overcome the fear associated with the subject and is usually one that insurance salespeople will support. The good news is that having too much is probably better than not enough. The bad news is that having too much is not as good as having purposefully purchased the right amount for your situation and using the money you save to pursue other goals.

How Much Life Insurance Do You Need? (2 Ways)

MATH WARNING: When you’re looking at long term financial needs it’s very important to include projected investment returns and inflation rates to assess the Time-Value of Money (TVM). I have avoided equations in this article but practically, this means we find a number today and project it to the future or find a future number and discount it to a dollar amount today. If you aren’t clear on these ideas you can find financial calculators online, estimators that include these projections, or get help from a professional.

Method # 1 Human Life Value - The Human Life Value approach reduces the value of all the future earnings of the insured that contribute to household expenses to a current dollar amount to insure. In short, to manage the risk that one partner passes away and earns no future income (including raises), an insurance policy is purchased in the amount that, if received today, could cover that lost income, to the extent that that income is used to pay the bills. Using this method requires subtracting taxes and the insured’s expenses from their current annual earnings, assigning a number of years left in their working life, calculating the future value of their earnings (including pay increases), and discounting that value to today to find the insurance need.

Method # 2 Needs Based - Needs Based calculations attempt to account for the expenses of the survivors of the insured. Once this figure has been determined a policy can be purchased that adequately covers the final expenses of the insured and all, or a portion, of the ongoing expenses of their surviving family members. When using the Needs Based approach it’s important to consider a variety of future income streams and expenses to find an accurate picture. Examples of expenses to consider include:

  1. Funeral costs and final medical expenses of the insured
  2. Cash flow, debt-repayment, ongoing income, and retirement funding needs of a surviving spouse
  3. Income and college funding needs of surviving children.

These future expenses are discounted back to a present value and added together to a number that will cover those needs through an insurance policy.

There are several other methods clients can use to assess their insurance needs as well as variations of the above methods. Professional planners often run multiple strategies to identify insurance needs as accurately as possible for a particular client’s situation. If you have questions about your insurance needs, remember Reach Strategic Wealth is a fee-only financial planning firm which means we help clients analyze their needs while never accepting commissions for the sale of financial products. Follow this link to Schedule an Introduction with a fee-only planner today!


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