LIFE INSURANCE: No guesswork when determining amount

September 16, 2022

2:00 minute read –  The larger the life insurance amount (as well as long term disability policy for personal or business use) the more important the details are about how the amounts were determined.

How much does a life insurance company think that you’re worth? Many times, it is much more than you actually think, and there are guidelines to prove it. But, no guesswork.

The most common insurance need among clients is to replace the income (and replace projected lost sales or value, when this is for business purposes, aka, key-person life insurance) survivors would have anticipated had premature death not occurred. The starting point for calculating the amount of coverage a carrier will issue for purposes of income replacement is determined by a multiple of current annual compensation based on the proposed insured’s age.

The multiple decreases with age, understandably, because death denies a person fewer potential income-producing years as they get older. Multiples vary from company to company. Insurance underwriters will usually only take earned income into consideration unless it can be shown that the insured’s death might have a direct effect on unearned income.

RULE OF THUMB: When this is for businesses purposes, history matters. 3 to 4 years of sales-record, for example, is valuable here. If it’s for someone not involved with measurables like sales, such as the CFO or CEO, replacement value has often been used.

An experienced insurance advisor will have a go-to-team to zero-in on specific guidelines, before formal underwriting occurs, working out details of the amount of death benefit will be key. Ask about the value of approaching this with a trial application if there are questions surrounding the determination of the value of the death benefit, or, health issues which the proposed insured has or recently had.

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