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Strategies For Putting A Value On The Clients Life

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Recommending how much life insurance a client should buy can be crucial, say insurance producers and registered reps. Getting the figure right depends on critical decisions relative to the technique employed, and the assumptions made, in calculating the death benefit amount.

These decisions, in turn, hinge on a proper understanding of the client’s goals and objectives.

“I initially concentrate on the soft facts: how clients think and feel and what matters to them,” says Philip Harriman, a second vice president of the Million Dollar Round Table and a partner at Lebel & Harriman, Falmouth, Maine. “That makes it easy to decide which approach will motivate the client to take action.”

Prospects who desire to provide for family needs after their death–replacing income to cover monthly expenses, paying off the mortgage or funding a child’s college education–will be receptive to basic financial needs analysis, says Harriman.

A more advanced evaluation would be appropriate for, say, the business owner who is reluctant to engage in a corporate restructuring because the transaction is contingent upon purchase of a life insurance policy.

How much life insurance is enough? Reps say a rough estimate for an individual policy can be had by multiplying the client’s income by some multiple. The American Banker’s Association advises securing a death benefit equal to 12 times the client’s after-tax income, for example.

Usually, however, reps use more sophisticated techniques. The first of these, the needs analysis, determines the income replacement needs of one’s survivors.

Arriving at this number requires a determination of the “present value” of the collective needs, say sources. The term derives from the “time value of money” concept, which says that a dollar received today is worth more than a dollar received tomorrow because, when invested in an interest-bearing account, its value compounds over time.

The needs analysis may factor in, for example, the income required by policy beneficiaries during a “readjustment period”; an estate clearance fund or comparable vehicle for liquidating assets; life income to a widow(er); educational funds for dependents; plus emergency and retirement funds. After summing the present values of income replacement for all financial needs of dependents, existing assets, plus the face amount of current life insurance in force, can be subtracted to determine the life insurance needed.

A second technique, the human life value approach, determines the value of a human life as one’s monetary contribution to one’s dependents. The technique calculates the expected amount of money available to a client’s family each year of the client’s life; determines the number of years the client is expected to generate income; then derives the present value of the client’s stream of expected earnings.

Richard Murphy, a registered rep and president of Richard C. Murphy Insurance, Syracuse, N.Y., says that he finds the human life value approach especially useful when highlighting to clients the disparity in coverage levels among the insurance policies they own. Many individuals, he notes, insure their home, auto or personal property for a high percentage (typically 80% or more) of their replacement costs, but underinsure “the money machine” (themselves) because they don’t know their human life value.

A third technique, the capital retention approach, arrives at a dollar figure by determining the amount of life insurance needed in addition to existing income-producing assets to provide the desired level of income. The technique, observes Marc Silverman, a registered rep and president of Silverman Financial, Miami, Fla., lends itself well to high-net-worth individuals and business owners who have complex financial planning needs.

The recommended death benefit, advisors say, will vary not only with the method used but also the assumptions underpinning the calculation. Among these are the figures one attaches to the percentage of income devoted to consumption, the insured’s marginal income tax bracket, the rate of inflation and the net after-tax rate of return on investments.

One also needs to make assumptions about sources of income. Silverman advises against factoring Social Security into financial needs analyses because “we don’t know whether it will be around in 10 years.” Similarly, clients may be well advised to overestimate the insurance need by excluding an expected company pension or family inheritance.

“No widow ever said that ‘my husband died and left me with too much money,’” says Silverman. “Given the choice, I would rather overestimate the insurance need than underestimate it.”

Financial calculators that simplify the insurance need determination are available through certain Web sites, such as, which is operated by Life and Health Insurance Foundation for Education. But Harriman points out that such calculators use different assumptions and, therefore, may yield widely varying figures.

Also subject to variation is the time needed to produce a recommended dollar amount. For straightforward cases involving individual policyholders, the discovery process, including a determination of the client’s goals, objectives and financial position, generally requires no more than two or three visits with the client. More complex cases involving buy-sell agreements, business succession plans and key person insurance can take weeks or months to resolve.

Occasionally, sources say, discussions are prolonged because clients hesitate–or refuse–to provide certain facts relative to their finances. Sometimes, too, face amounts need to be revised downward because prospects don’t have the income needed to support their stated goals and objectives.

“I’ve not had in a long time a case where a client bought exactly what I had recommended,” says Murphy. “I let clients prioritize for themselves what they want. Oftentimes, the result is they buy enough to cover anticipated debts but defer funding of retirement objectives.”

Alternatively, reps frequently will suggest fixing the death benefit at the prescribed amount, offering a mix of permanent and term insurance to keep within the client’s budget.

“There’s nothing wrong with renting insurance if you can’t afford to do all of it permanently,” says Silverman. “The last time I checked, no one asked after someone died whether the proceeds came from a term or whole life policy. Beneficiaries only want to know when they get the money.”

This article first appeared in the August 2005 issue of Registered e-Report, an online publication of National Underwriter Life & Health. You can subscribe to this e-newsletter for free by going to

There are a number of techniques for determining how much life insurance is enough.


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