As a life insurance agent, you are not just a simple salesperson. Sure, you sell products such as life insurance to your clients, but you do so much more for them. One of the most important things you can do for your clients is to help them decide exactly how much life insurance they need and which type of product would work best for them. By performing a life insurance needs analysis, you can help your clients make an informed decision they can be confident in. Here are the four main steps to figuring out the monetary needs for your clients.
As a leading Insurance Marketing Organization (IMO), Good Life Insurance Associates (GLIA) provides a full range of insurance products, services and tools to support your individual clients’ wants and needs. Let us help you establish and grow your insurance business! Learn More
Step 1: Detail Income Needs
The first step in the life insurance needs analysis process is to detail the family’s income needs. In this step, you’ll determine the capital that will be required for the family’s income should the insured pass away.
Start by laying establishing the insured’s current income, the family income goal, the survivor’s income and any other income. Then, calculate the annual income shortage this results in and the total capital necessary for income based off an earnings rate adjusted for inflation.
Example
- Current Income: $100,000
- Family income goal: $80,000 (80% of insured’s income)
- Survivor’s income: $40,000
- Social Security income: $25,000
- Income shortage: $15,000
For this analysis, a standard acceptable earnings rate to use is 5%. To determine the capital the family would require for income, divide their income shortage by 5% (0.05). In this example, doing so would result in $300,000 in capital ($15,000 / 0.05) required for the family’s income.
Step 2: Detail Cash Needs
The second step is to factor all expenses the family would want to cover through a life insurance policy should the insured pass away. The most common expenses are end-of-life costs, funds for sending kids to college, paying off the mortgage and other debts, and having emergency funds on hand.
Simply add all of these totals up, then add them to the capital income required from Step 1, and you’ll have the total capital the family will require.
Example
- End-of-life costs: $15,000
- Mortgage: $150,000
- Debts: $20,000
- College funds: $45,000
- Emergency funds: $20,000
- Total needs for cash: $250,000
- Total required capital: $550,000
Step 3: Detail Assets & Other Capital
The next step in a life insurance needs analysis is to factor in any current assets and capital that will provide income for the family. This should include any liquid assets the family has in bank accounts, stocks, etc., and any other life insurance, for example.
Example
- Current bank balances: $40,000
- Stock assets: $10,000
- Other life insurance: $100,000
- Total Current Capital: $150,000
Step 4: The Final Determination
The final step is quite simple. Subtract the family’s total current capital from their total required capital to find out how much money they would need to be covered through life insurance. In the example we laid out, the family would need $400,000 in life insurance to cover all their income and expense needs ($550,000 total required capital – $150,000 total current capital).
Discussing the Right Insurance Product
The total coverage level is only one aspect of a life insurance needs analysis. Once you have this number in mind, you need to figure out the right product for your client. As you know, there are two main types of life insurance: term life insurance and permanent life insurance:
Term Life Insurance
Term life insurance will cover clients for a set period of time. The most common terms are 10, 15, 20, 25 and 30 years. If the insured passes away during the term of the policy, the benefit will be paid to their beneficiary. Once the term expires, the policy is no longer in effect, and no benefit will be paid out.
Permanent Life Insurance
Permanent life insurance, by contrast, remains in place for the entire life of the insured. No matter when the insured passes away, the life insurance policy pays a benefit to the beneficiaries. Some of these policies have options that allow the amount of coverage to grow over the life of the policy.
Which One is Better?
This is where a discussion with your clients is necessary to determine which type of policy is right for them. While term policies do end, they also have a less expensive premium.
The life insurance needs analysis here should discuss the family’s financial needs after the term life policy they are considering compared to a permanent policy. For this example, let’s compare a 30-year term plan to a permanent policy.
If your client is 25 years old with two young children and are renting a home, a 30-year term policy may not last long enough. When the policy expires when the client is 55 years old, the family may still have significant expenses left if the insured passes away not long after the policy expires.
In this scenario, a permanent policy may be more beneficial to ensure the mortgage of a future home the family may purchase can be paid off, as well as the children’s college expenses can be paid for.
If the insured were 55 years old with two adult children out of college and a mortgage with 10 years remaining, though, a permanent policy may not be necessary. In fact, a shorter-term policy might be a better fit.
Final Thoughts
All life insurance needs analyses are unique to each client. That’s why it’s important as a life insurance agent that you take the time necessary to sit down with your clients and understand their needs before making a suggestion on which life insurance policy would be right for them.
As a leading Insurance Marketing Organization (IMO), Good Life Insurance Associates (GLIA) provides a full range of insurance products, services and tools to support your individual clients’ wants and needs. Let us help you establish and grow your insurance business! Learn More