Do A DI Needs Analysis To Uncover Need For Life Or LTC Insurance

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“How much life insurance do I need?” Its a question as old as the life insurance industry.

The question surfaces a lot in long term care insurance scenarios, too: “How much LTC do I need?”

For middle-income working-age people with family obligations, both questions may be best answered by analyzing the clients need for disability income insurance coverage.

DI replaces lost income that would normally pay for day-to-day living expenses. If you think about it, life and LTC insurance do essentially the same thing. So, why not talk with your life and LTC clients about personal income needs? It will help you approach those sales in a more self-interested way.

Lets first consider a life-needs approach. If the client agrees he or she would need “\$XX” each month in the event of disability, the person should acknowledge that his or her survivors would need similar income protection in the event of his or her death.

[Note: This approach can also dilute the potential for certain objections--e.g. "I am not looking to make my spouse rich!"--since you are clearly talking about providing survivors with little more than food, clothing and shelter.]

The analysis of the monthly and/or annual household income need is simple. (See chart.) Multiply the Total Monthly Expenses by 12 Months to find the Annual Household Income Need.

If there are two wage earners in the household, the agent may want to review each wage earners need, reducing the Annual Household Income Need by the after-tax income from the “survivor.” The calculation would go like this: Annual Income Need minus the Survivor After-tax Annual Income equals the Adjusted Need.

The next step is to determine how long the survivors should get a monthly income and how much money will be required to accomplish this goal. If income is to be provided for a specific period of time, (e.g., five years), the calculation is: Annual/Adjusted Need times the Number of Years equals the Survivor Lump Sum Need

If income is needed for an indefinite period of time, use a “capitalization of income” calculation: Annual/Adjusted Need/Assumed Rate of Return Percentage equals the Survivor Lump Sum Need.

You can provide for the “Survivor Lump Sum Need” in many ways, of course. If your prospect has lots of cash in the bank, he or she may not need life insurance. If the person has some cash on hand, you can subtract that from the lump sum need in calculating the life insurance need.

The benefit: Using this income replacement need analysis approach to calculate the need for survivor income will allow you to say to the client, with confidence: “I recommended this amount of life insurance for the same reason I have recommended that amount of DI insurance. It replaces your income, money that would normally pay for day-to-day living expenses.”

Likewise, with LTC sales scenarios. An income replacement analysis can help you identify need for this coverage (as well as other financial needs and sales opportunities).

To help a prospect understand the financial impact created by the extraordinary (i.e. over and above ordinary) nature of LTC expenses, return to the second step of the above Income Replacement Need Analysis: Multiply the Total Monthly Expenses times 12 Months to arrive at the Annual Household Income Need.

Now, calculate the additional impact that LTC expenses would have on a household (whether incurred by a spouse, aging parent or other family member): Daily LTC Expenses times 12 Months equals the Annual LTC Need.

Next, add the two sets of expenses together to demonstrate the enormous impact that LTC expenses could have on a households financial situation: Annual Income Need plus the Annual LTC Need equals the New Household Income Need.

The natural question for you to ask at this point may be: “Assuming you could continue to meet your regular monthly expenses, where will the money come from to pay for additional LTC expenses?”

As with survivor income needs, the client may be able to pay for LTC expenses out-of-pocket–if there is enough money in the bank. To see if this is a reasonable solution, use the same calculation methods as you used for calculating the Lump Sum Survivor Need to calculate the lump sum LTC need.

The benefit: In most cases, this process will help you demonstrate that using insurance to cover the LTC need will be more reasonable than relying on the availability of a large amount of cash in the bank.

is a partner at Disability Insurance Specialists, LLC, Bloomfield, Conn., and may be e-mailed at MAMEIGH@dispec.com.

Reproduced from National Underwriter Life & Health/Financial Services Edition, February 25, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.