How much Life Insurance does one need?

Nov 3, 2007

  1. senior-advisor-indiana
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    senior-advisor-indiana Guru

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    When talking to someone about life insurance how do you know how much to recommend and which type(term or WL)? For example.

    32 year old couple, both work, 2 kids, husband makes 45k wife makes 30k. What do you do? Both in good health too.
     
  2. Survivor
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    First of all, I like UL because you can make it last forever or not, if you choose. I hate term. The only time I like to sell it is when some one absolutely can't afford anything else or they have their mind set that that is all they want. When they want a 20 year term, I normally ask, "Do you think that you would want life insurance at age (current age + 20), because if you do it will be extremely expensive."

    In this case, is it going to be a joint life policy?

    On an individual basis, this is how I do it:
    I ask for any outstanding debt (credit card bills, auto loans, etc)
    I ask for the balance on their mortgage or their home equity loan, or if they rent what their rent payment is (then will figure in 10 years worth of rent)
    If they are married and have kids, I like to add a year's worth of income at least (when the mortgage or rent is paid, it helps make up for a lot)
    I then ask, "if you were to pass away today, would you want to be able to fund your children's education."
    I add in about 10K for burial and any other misc bills they might incur on the way out.
    I then subtract away about 25-50% of their savings, if any.
     
  3. GreenSky
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    GreenSky Guru

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    These guys probably can't afford much more than a term plan. I tend to doubt that most people need life insurance past 60-65, but others argue the other way.

    I would write 20 year plans for $500,000 each. If they are preferred, it should cost next to nothing. If their health deteriorates as they age, they can convert as much of it as they want. In 10 years, if they are still healthy, you could check their situation and either write more term or UL. This is basically my K.I.S.S. principle.

    I don't care if someone "invests the difference". Life insurance is an expense, not a savings account.

    By the way, I'm the first to admit that I am a health insurance agent, not an expert in the financial aspect of life insurance. I just don't see much value in the permanency of a plan that likely will not be needed after retirement.


    By the way, I'm 53 and just bought my last term policy. Once I'm 68, I know I won't need any life insurance so a WL or UL would have been worthless. (Then again, I am investing monthly.)

    Rick
     
  4. CHUMPS FROM OXFORD
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    CHUMPS FROM OXFORD Guru

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    Buy term and invest the difference is a great concept. But while most people intend on doing that, the difference invariably gets spent on other things.

    By the way...I spelled "invariably" correct. No spell check was needed. I'm a hell of a speeler.
     
  5. djs
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    djs Super Moderator Moderator

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    I look at it a bit different. We call it life insurance, but face it, it's income insurance for most people. The sudden departure of an income into the household will cause a problem, that can easily be solved.

    I've never understood basing the amount of life insurance on the amount of debt. It's really more about life style. In other words, if I paid off someones debt, they could survive on significantly less money (depending on how much debt they had), and maintain the same lifestyle. So, I simply figure out how much $$$ I need to replace the missing income on a regular basis, and use that.

    Simply put, 7 to 10 times the income of the person. If they are in their 20's, I'll take a bit of an advantage of the rates they get and use 12 times.

    Term insurance is usually far more expensive than permanent (similar to renting an apartment is more expensive than buying a house), but, on a cash flow basis, is usually a LOT more affordable.

    I then followup with a final rule of mine, which simply put, they need to be sure they can pay the premium, good times, bad times, all the time. If they can't, I'll reduce the db to get to a point they can (if that is really the issue). I'd rather see them have a little less in coverage, and have it in force, rather than it going out of force and then needing it.

    Dan
     
    djs, Nov 3, 2007
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  6. Survivor
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    Are you sure that you will not want to be able to guarantee that your heirs not pay taxes and that the money that your heirs will receive will not go through your estate.

    For instance, say you had some large some of money that you wanted to shelter from taxes. When you are of a certain age, you could switch to option B (if you weren't on it already) on universal life, dump a huge sum of money in, and it now becomes death benefit, essentially.
     
  7. 2112Greg
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    The way I see LI is prety simple. If there are tight budget constraints, I look at it this process...

    1. We determine how much they would need through a calculation and it's outside their budget, I would then...

    2. Look at getting the most coverage possible with the amount of money they are comfortable with.

    Not exactly rocket science...but it doesn't need to be, either.

    Term is so inexpensive these days that bang for the buck, as in premium to benefit, is almost astronomical. Obviously, at this point UL or any other variation is already out of the question...this is the approach that I would take when term is the only option (and it generally is the right fit for the clients that I do LI for).
     
  8. LGilmore
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    LGilmore Guru

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    "I tend to doubt that most people need life insurance past 60-65, but others argue the other way."

    It's called retiring "RED" as in still in debt.. Not all baby boomers are doing that well....

    "Are you sure that you will not want to be able to guarantee that your heirs not pay taxes and that the money that your heirs will receive will not go through your estate.

    For instance, say you had some large some of money that you wanted to shelter from taxes. When you are of a certain age, you could switch to option B (if you weren't on it already) on universal life, dump a huge sum of money in, and it now becomes death benefit, essentially."

    You are assuming the policy is in a illrevovable trust. Life insurance is not estate tax free. Income yes, ownership determines estate...

    as for the couple, what is their cash flow like? probably level terms to start with 500k is good. make em clients first...
     
  9. Survivor
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    IMO, setting up an ILIT (irrev. trust) is just a good part of estate planning anyway.
     
  10. bluemarlin08
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    bluemarlin08 Guru

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    What size estate do you recommend an ILIT?
     
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