Meet Veronica, your newest client. She’s a 33-year-old healthy professional woman with a family, earning $150,000 a year.

Working to age 75 (the new 65), she’ll earn more than $20 million in the next 42 years with 5 percent average annual increases. Or, more than $13 million with just 3 percent average raises. By far, Veronica’s human life value (HLV) will be her most valuable asset. But when you learn how much life and disability insurance she currently has to protect her HLV, you’re not surprised to discover she comes up short.

Veronica thinks about insurance — just not enough

Veronica has homeowner’s insurance and auto insurance — it’s required by mortgage companies and state liability laws. She’s likely to have at least $5 million umbrella liability coverage. And, if she collects fine art, we hope she has the appropriate scheduled coverage rider; her homeowner’s insurance company has certainly told her to obtain an appraisal and keep it up to date. Her home and car and valuable personal effects are also important assets. 

But what about her most valuable asset?

As you start to convey the issues surrounding her good fortune, your research reveals that at this age, Veronica has a fairly low, 16 percent personal disability quotient (PDQ).  It means she only has a one in six chance in her lifetime of being injured or becoming ill and being unable to work for at least three months. If she is out of work for three or more months because of a disability, she has a one in three chance of still being unable to work after five years. The average length of disability for her age and health and activity is 6.5 years, according to the Council for Disability Awareness. At the same time, she has a 5.1 percent chance of dying before she turns 65, according to Society of Actuaries CSO tables for non-smokers. Once again, you consider that initial question: How much disability and life insurance does she carry on her most significant asset?  Not nearly enough!

We’re only human

Client attitudes about risk are somewhat at odds with reality. Perhaps 25 percent of the population suffers from some degree of fear of flying, yet it’s arguably the safest form of travel. Compared to the relatively low 0.14 percent risk of dying in your lifetime while crossing the street, a lifetime’s risk of death by flying is 0.01 percent. And while we all have an ultimate 100 percent chance of dying, our attitudes are also confused by not wanting to think about something so drastic and awful as our death.

It’s understandable none of us want to contemplate death, but there’s an ongoing financial crisis Veronica and most of her peers haven’t considered. While 85 percent of consumers agree that most people need life insurance, just 62 percent say they have any insurance, let alone a sufficient amount. Worse yet, according to LIMRA, only 36 percent of American families have personally owned life insurance. This suggests two-thirds of American families have no HLV insurance beyond what may be provided by nominal group coverage. Even fewer families have adequate disability insurance. 

By the numbers

  • There’s a 0.03 percent chance your client’s home will burn down in their lifetime. People typically insure 100 percent of their homes against loss.
  • There’s a 7.9 percent chance a 38-year old male will die before age 65 according to Society of Actuaries data, and at best he will have insured five percent of the U.S. median household income of approximately $50,000.  

Presumably Veronica wouldn’t consider insuring just 10 percent of her home, so why would she only insure 10 percent of her life — especially given the odds? 

Perhaps she thinks somehow the family will get along financially. But Veronica should be advised:

  • Recent focus groups have revealed most consumers believe adequate individual life insurance coverage is two-to-three times their income, well below the industry recommended eight-to-10 times their income.
  • According to a 2015 article in the New York Times, three in 10 non-elderly Americans said they had no retirement savings or pension. The same fraction reported going without some kind of medical care in the past year because they could not afford it. And, almost one-quarter reported that they or a family member had experienced financial hardship in the past year. And in a 2015 Federal Reserve survey, 47 percent polled responded they would not have the resources to meet an unexpected expense of $400 — yes,$400! They would have to sell something or borrow to meet that need, if they could meet it at all. 

If a premature death prompted the unexpected financial shortfall, that certainly creates an immediate need for a lot more than $400!

How much is enough?

There are more than enough life expectancy and insurance calculators on the Internet to keep consumers busy for weeks. When it comes to bottom line advice — the simplest way to get through all the complexity — consider the following recommendations to Veronica and her peers.

For disability: They should buy as much insurance as they can get, because they can generally only obtain at most 70 percent of what they earn — and family expenses will inevitably be higher. They should buy individually underwritten coverage first, and then buy group or association insurance if they can’t get (or afford) enough individual insurance. Your clients will need every penny of it. An easy way see what it might cost instantly, in the privacy of their own home, is to use a calculator to determine their coverage needs and then configure a policy that meets their budget.

For premature death: Consider what the amount of the shortage is between net take-home pay and ongoing monthly family expenses.  For example, if it is $5,000 per month and your client is 38 years old with a same-age surviving spouse who has a life expectancy of another 50 years. Here’s the math: $5,000 a month x 12 months x 50 years = $3 million.

Have we ignored that the client could invest that money and reduce the capital amount? Sure. But we also didn’t take into account the loss of purchasing power from inflation. We haven’t taken into account how to best invest that much money nor have we considered the cost of future college educations and future weddings. Is this too simplistic?. Maybe. But it actually does a good job of estimating the magnitude of the need.

The real problem with a number like $3 million is that it’s a big number — really, really BIG! Most of us can’t imagine that much cash lying on the kitchen table. The life insurance industry has long missed the point that what surviving families need is a monthly resource to pay for monthly expenses. So don’t guide your clients to think of it as a lump sum but instead to think what it’s providing: $5,000 a month forever.

OK, now what?

All of this can be paralyzing to even a high-earning client. That’s why so few households have adequate life and disability insurance coverage. Consider advising your clients to take the following steps:

1. Figure out the monthly amount of needed replacement income on each working spouse and help them do the simple math as described above to figure out the amount of life insurance for each. Subtract whatever insurance they currently own. That’s their number. 

2. Don’t worry about the kind of life insurance right now. Encourage them to buy enough term insurance from a quality insurance company to make sure their family is protected. Make sure at least half of it is favorably convertible to other permanent insurance like whole life insurance — a decision your client can start making in a few years.

3. Buy as much disability insurance as they can — group, association or individually underwritten.

4. Have your client check with their homeowner’s insurance agent and make sure they really have enough coverage on their home and autos. Legislated minimums are way too low for most people’s needs. Check to be sure they have enough umbrella liability. Have they purchased scheduled riders for valuable collections? If their home and auto is in a revocable trust, are the trustees named in the policy as trustees?

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