How Much Life Insurance For Income Replacement

[Robert Barney]

For almost 30 years I have been using this method to calculate the capital cost of replacing an income.

Income Replacement Calculator

The method tends to come up with much higher requirements for life insurance, by comparison to more traditional methods of insurance needs analysis. A lot of agents reject it for that reason; I strongly disagree.

I was just going over the new underwriting requirement booklet for one of the life insurance companies and came across this:

FINANCIAL UNDERWRITING ​

[FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn][FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn]The single most important consideration for financial underwriting of any size case is knowing how the sale was made. If the sale makes sense to the Agent, then it will probably make sense to the Underwriter. [/FONT][/FONT]​

[FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn]

[FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn]All of the information below is given only as a guideline. We depend heavily on the Agent to help us understand the purpose of the coverage. [/FONT]​

[FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn]The Writing Agent is a key source of information and usually the best source. Through the cover letter, he or she can provide an explanation of the method used to establish the requested face amount. The cover letter is also the perfect place to clarify any unusual aspects of the case. [/FONT]​

[FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn]If the case is complicated and other carriers are involved, the cover letter should clarify all coverage amounts in-force, applied for, and/or being replaced. [/FONT]​

[FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn]Copies of an estate planning analysis and available financial statements should accompany cases in which large amounts are requested or are already in-force. For business insurance, copies of an audited financial statement or even a less reliable, unaudited statement prepared by a CPA firm is of great help to the Underwriter. In some cases, these statements may be required depending upon the depth of the information the inspection company can develop. Certainly for very large amounts, a statement would be required. [/FONT]​

[FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn]Third Party Financials will be required on face amounts of $5 million and up. [/FONT]​

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[FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn][FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn]Personal Insurance [/FONT][/FONT]​

[FONT=Frutiger LT Std 55 Roman,Frutiger LT Std 55 Roman][FONT=Frutiger LT Std 55 Roman,Frutiger LT Std 55 Roman]Ages - [/FONT][/FONT][FONT=Frutiger LT Std 55 Roman,Frutiger LT Std 55 Roman][FONT=Frutiger LT Std 55 Roman,Frutiger LT Std 55 Roman]Income Multiples [/FONT][/FONT]​

[FONT=Frutiger LT Std 55 Roman,Frutiger LT Std 55 Roman][FONT=Frutiger LT Std 55 Roman,Frutiger LT Std 55 Roman]18-30 - [/FONT][/FONT][FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn][FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn]30 [/FONT][/FONT]​

[FONT=Frutiger LT Std 55 Roman,Frutiger LT Std 55 Roman][FONT=Frutiger LT Std 55 Roman,Frutiger LT Std 55 Roman]31-35 - 2[/FONT][/FONT][FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn][FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn]5 [/FONT][/FONT]​

[FONT=Frutiger LT Std 55 Roman,Frutiger LT Std 55 Roman][FONT=Frutiger LT Std 55 Roman,Frutiger LT Std 55 Roman]36-40 - [/FONT][/FONT][FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn][FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn]20 [/FONT][/FONT]​

[FONT=Frutiger LT Std 55 Roman,Frutiger LT Std 55 Roman][FONT=Frutiger LT Std 55 Roman,Frutiger LT Std 55 Roman]41-45 - [/FONT][/FONT][FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn][FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn]18 [/FONT][/FONT]​

[FONT=Frutiger LT Std 55 Roman,Frutiger LT Std 55 Roman][FONT=Frutiger LT Std 55 Roman,Frutiger LT Std 55 Roman]46-50 - [/FONT][/FONT][FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn][FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn]15 [/FONT][/FONT]​

[FONT=Frutiger LT Std 55 Roman,Frutiger LT Std 55 Roman][FONT=Frutiger LT Std 55 Roman,Frutiger LT Std 55 Roman]51-55 - [/FONT][/FONT][FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn][FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn]12 [/FONT][/FONT]​

[FONT=Frutiger LT Std 55 Roman,Frutiger LT Std 55 Roman][FONT=Frutiger LT Std 55 Roman,Frutiger LT Std 55 Roman]56-60 - [/FONT][/FONT][FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn][FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn]10 [/FONT][/FONT]​

[FONT=Frutiger LT Std 55 Roman,Frutiger LT Std 55 Roman][FONT=Frutiger LT Std 55 Roman,Frutiger LT Std 55 Roman]61-65 - [/FONT][/FONT][FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn][FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn]8 [/FONT][/FONT]​

[FONT=Frutiger LT Std 55 Roman,Frutiger LT Std 55 Roman][FONT=Frutiger LT Std 55 Roman,Frutiger LT Std 55 Roman]66 and over - [/FONT][/FONT][FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn][FONT=Frutiger LT Std 47 Light Cn,Frutiger LT Std 47 Light Cn]6 [/FONT][/FONT]​

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[termlifeinsuranceus]

Bob,
I use your income replacement calculator all the time. It's particularly helpful when a client asks "how much do I need?"

 

[0b1kanobee]

I have a question. The first question on the calculator asks "Gross Annual Income Required by dependents".

Is this?:

1) What the current annual gross income of breadwinner is?
2) " " " " " " " " " " " "" " " " " """ """ " """ "" " breadwinners is?
3) An average of the last so many years?
4) The amount required to pay current bills?

Just how exactly does one arrive to the answer for the first question? I understand the rest of the questions.

For example, the breadwinner might gross 150K a year. However the amount required by the dependents might only be 75k per year. So are we talking about what the breadwinner makes, an average of what the breadwinner makes or what and define along with give an example/s of required.
Thanks!

 

[Robert Barney]

I have a question. The first question on the calculator asks "Gross Annual Income Required by dependents".

Is this?:

1) What the current annual gross income of breadwinner is?
2) " " " " " " " " " " " "" " " " " """ """ " """ "" " breadwinners is?
3) An average of the last so many years?
4) The amount required to pay current bills?

Just how exactly does one arrive to the answer for the first question? I understand the rest of the questions.

For example, the breadwinner might gross 150K a year. However the amount required by the dependents might only be 75k per year. So are we talking about what the breadwinner makes, an average of what the breadwinner makes or what and define along with give an example/s of required.
Thanks!

Great question.

It is the gross income of the individual who could die. If I make $75,000 per year, and my wife makes $75,000 per year, one would assume that if I die, my wife will continue to be able to make $75,000 per year. It's not her income I am looking at for my insurance, it is my income.

You would then repeat the exercise for the second income.

You could use an average, particularly if last year's income was $50,000, but the average of the last 5 years was $75,000. Ultimately, you want to use the income amount that the client agrees to.

NOTE: The key aspect of the income replacement calculator is that you secure the clients agreement with all the input values BEFORE you click the "Calculate" button. If they agree with the inputs, then they can't dispute the results.

Looking at "how much to pay bills" is a waste of time. This is the old, do the family budget nonsense. It's time consuming and why would they change their lifestyle if they don't have to.

If they say the husband makes $150,000 per year, but they can live on $75,000, ask them if they are investing $75,000 per year now? Why not? Oh, because they like doing this or that. Fine, why would that change if he dies? Now if it turns out he likes to gamble and loses $75,000 per year, then insure him for $75,000. But get into the details.

Example: If I die my wife could sell the house.

Response: I see, is your house for sale now? No? Why not, wouldn't it be nice to save that money?

Example: If I die my wife would go out to work.

Response: I see, is you wife looking for work now? No? Why not, couldn't you use the extra money.

Ultimately these things are not happening because they like living in their current house and the wife is busy doing other things. Why should the death of the husband change any of that? The whole point of insurance is to replace what is lost. Do you put $200,000 of insurance on a $500,000 house?

 

[xrac]

Thanks for the post!