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Life Insurance: the right amount, at the right time, for the right cost

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Life insurance isn’t a subject many people get excited about.  But when it comes to family financial security, it can be extremely important.

Why? Because a life insurance policy has the potential to deliver thousands of dollars to the loved ones named as beneficiaries.  And, under current tax law, death benefit proceeds are generally income tax free.

No one wants to have too much life insurance coverage, but they don’t want to have too little either.  Having too little coverage could be financially disastrous for their family. 

The goal with life insurance is to have the right amount of coverage at the right time for the right cost.  That’s easy to say, but hard to do.  How can people be sure you have the right amount of coverage at the right time for the right cost?

Manage Insurability

Financially savvy people understand that managing their insurability can be as important as managing their other financial assets.  Because of life insurance’s potential ability to deliver thousands of dollars of death benefits, they treat the policies they own and their ability to purchase additional coverage as valuable. 

They manage both their policies and their future insurability carefully.  They understand that life insurance is an asset that must be purchased in advance while they are healthy.  To make sure they have the right of amount of coverage at the right time for the right cost they take a proactive approach to manage their insurability.

A Four Step Process

Proactively managing a client’s insurability is a four-step process:

  1. Identify the upper limit of life insurance coverage.  Insurance companies establish financial limits on how much coverage they are willing to issue to applicants based on their age, income and net worth.  These financial guidelines are published and readily available.  They assume that potential insureds are in reasonable health.  In many cases, finding out the maximum amount of coverage that could be in force today is relatively simple.  This amount is called “life insurance capacity.”  Knowing this amount is an important starting point for making informed decisions and managing insurability.
  2. Determine The “insurability reserve.”  A person’s insurability reserve is the portion of one’s life insurance capacity that is available but which is not yet being used.  The insurability reserve is easy to calculate:  add together the amount coverage from all in force policies and subtract the total from the life insurance capacity.  The remainder is the insurability reserve.
  3. Decide if it makes sense to use some of the insurability reserve today.  After updating one’s financial situation and reviewing goals, it’s time to decide if it makes sense to use part of the insurability reserve.  If this makes sense, a person needs to formally apply for this additional coverage.  The insurer should issue the new policy if its underwriting criteria are met.
  4. Review in-force policies and insurability reserve annually.  Each year, one should review both in force policies and re-calculated Insurability Reserve.  

An Insurability Reserve is Temporary. 

Everyone’s life insurance capacity changes over time.  With age, nearly everybody’s insurability reserve is likely to decrease.  At some point, it may disappear altogether.When this happens, new life insurance coverage may no longer be available, no matter how much it may be wanted or needed.  This is why managing Insurability today is so important. A Tool: ING’s Life Insurance Capacity Calculator

ING U.S. Insurance has created a computer tool to people manage their insurability by estimating their life insurance capacity and insurability reserve.  The calculator asks several simple questions and based on the answers it compiles an estimate of an individual’s life insurance capacity and insurability reserve.  It usesING’s financial underwriting guidelines in its calculations.

Agents are finding this to be an extremely useful sales tool.  By showing clients their personal life insurance capacity and insurability reserve, agents can help them make informed decisions on protecting their families’ financial security.  More and bigger sales are occurring as a result.   

Peter L. McCarthy, JD, MBA, CLU, ChFC, is a senior advanced sales consultant for ING U.S. Insurance’s life sales support. He has more than 20 years of experience in advanced marketing and has previously worked as advanced sales counsel for Minnesota Life, Prudential Insurance Company, and American Express Financial Advisors. McCarthy practiced law as an estate planning attorney with a large Minneapolis law firm. He earned his JD degree from the University of Miami (FL) School of Law and an MBA from Rollins College.


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