One of the aspects I like most about my role in advising clients is that we get to talk about a lot of topics! We talk about family and goals, we talk kids, and of course, we talk about money. Unfortunately, talking about money can be one of the most sensitive subjects for people to discuss. In some households, it can even be frowned upon.
Though talking about life insurance isn’t the same as talking about money, the topic can still get touchy because in many households, life insurance is only thought of as something that gets paid out when someone dies (the living benefits are never fully understood).
So, it doesn’t surprise me that many have difficulty answering the question about how much of a death benefit they should acquire. Discussing it requires looking at two topics that many have a hard time talking about: death and money.
At Paradigm Life, we focus on helping our clients fully understand and utilize the numerous living benefits inherent to a high Cash Value Permanent Life Insurance policy. To us, the death benefit is a built-in feature that just adds more economic benefits to a family!
I had a client say recently that “I don’t even know how much Death Benefit I need.”
This prompted a good conversation that opened his eyes. We started to talk about the economic value he personally gave to his family. I asked questions about why he is working and why he spends time away from his family throughout the week to earn a paycheck. He acknowledged that he brings home a little over $100,000 per year to provide for his family so they can enjoy their lifestyle.
Now, this client is a good saver and a good investor. He was thinking that because he had money saved, he had no need for life insurance. To better illustrate my point, we talked about a hypothetical situation.
Question: How much life insurance do I need for my family?
Hypothetical Scenario:
Let’s say this client at age 50 suddenly passes away in a car crash. We agreed how sad this would be, and how he hoped his family would be able to survive on the savings he had tucked away. However, he acknowledged that they would no longer be receiving the $100,000 per year that he earns through his time and efforts at his job.
When the primary wage earner’s life is lost, the point of insurance is to make up for the family’s lost income.
Each insurance company has a different calculation used to determine the amount of death benefit needed, but typically you multiply your age by the amount of assets owned and annual income.
Ex: A 50 year old with 500,000 in assets and an annual income of 100,000, death benefit calculation would look like this:
20 years x 100,000 = 2 million of total coverage.
If a 70 year old with 500,000 in assets and an annual income of 50,000, the death benefit calculation would look like this:
500,000 of coverage (1x assets which provides more coverage than my income – 5x 50,000 = 250,000
Determining Your Economic Value
In my opinion, most people underestimate their economic value. At Paradigm Life, we help increase a person’s ‘economic value’ by adding a Paid-Up Additions Rider to their policy. A PUA rider puts more value onto the human life.
According to insurance companies, your death benefit calculation is cut and dry, it’s a formula. However, as a wealth strategist, I try to help you see beyond the death benefit calculation by maximizing your financial value while you are living. Interestingly enough, maximizing your living situation naturally increases your death benefit.
If you’d like to learn more about either the living or the death benefits of permanent life insurance, talk to a wealth strategist today, or contact us to schedule a consultation.
-Bryan McCloskey
Read: Discover How Life Insurance is a Cash Flow Resource
Watch: Family Banking that Works
Listen: Determining Capital Value
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