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Appendix
How Much Life Insurance Is Enough?
Thomas J. Wolff

Editor’s Note: Although an attempt can be made to measure the amount of life insurance required while a person is alive, the test of the accuracy of that measure will come after the person dies. Consequently the editor decided to ask a life insurance salesperson with broad experience both in planning estates and in working with families after death to author this appendix. While the balance of this text is written in the third person, the editor asked Mr. Wolff to write this section in the first person in order to fully reflect his experiences in both planning and settling estates.

WHO CAN DETERMINE NEEDS

Chapters 1 and 9 discussed the various needs that life insurance is designed to satisfy. The obvious question that these chapters raise is how much life insurance is enough. Since few lay people possess the necessary skills to evaluate their own requirements, the services of a qualified life insurance agent are normally required to help ascertain the amount and type of insurance best suited to a person’s needs.

KEEPING IT SIMPLE

A legendary life insurance salesperson, Grant Taggart, CLU, emphasized the importance of simplifying the need determination process. He stated it this way: "When someone dies money will be needed. The job of the agent is to determine who needs it and how much they will need. The agent must also possess the necessary skills to convince people to purchase the required insurance."

BUYER RESISTANCE

Why did Taggart feel it necessary to include the last sentence in his statement? One might think that once people know how much insurance is required, they will purchase it. Such, however, is not the case. Let’s examine the reasons for this buyer resistance. Because death is an unpleasant subject for all of us, most people are reluctant to focus on making an appropriate determination of their life insurance needs. So the first step of Taggart’s process, determining who will need money and how much, is in and of itself difficult for people to accomplish.

The second step, initiating the purchase of the appropriate amount of insurance, is even more difficult. Life insurance is an intangible product whose importance becomes evident at death. Since prospects don’t believe they will die in the near future, they don’t feel a sense of urgency. This problem is exacerbated by the fact that tangibles like cars, vacations, and a host of other inherently pleasing things compete with life insurance for the same dollars, so the purchase of insurance is often put off.

Life Insurance Has to Be Purchased before It’s Needed

Prospects are right when they comment that they don’t need life insurance "now." Where they are wrong is in postponing the purchase. The following anecdote, first shared with me by Alfred O. Grannum, CLU, will illustrate the point. In 1989 a United Airlines flight began losing power. The pilot, Captain Haynes, tried valiantly to control the vibrating aircraft, but it became evident that the plane would crash. If a Northwestern Mutual Life insurance agent who was on board had approached the passengers at that moment, no doubt all of them would have been willing to purchase life insurance. They finally knew they needed it.

Captain Haynes did a magnificent job of landing the plane in an Iowa cornfield. Nevertheless, half the passengers perished. The point is that like all other forms of insurance, life insurance must also be purchased before we need it so it will be there when we do need it.

The foregoing makes it abundantly clear that the professional life insurance salesperson performs the dual function of analyzing the need and motivating prospects to take action immediately. Retired insurance professor Joe Belth says one of the most important jobs of the agent is to get prospects to quit procrastinating. The planning process utilized by today’s professional agent may review any number of needs, including death, disability, education, accumulation, and retirement. This section will address only the death need.

HOW TO DETERMINE DEATH NEEDS

A variety of analyses are employed to determine how much insurance is required. The client’s situation will usually determine which analysis is used. For example, for a person of significant wealth (estates in excess of $600,000) an estate analysis may be warranted. In this type of analysis, assets and liabilities are carefully evaluated to determine the extent of estate taxes and other expenses. Recommendations usually include a plan for distributing assets and ideas for minimizing and paying estate expenses.

A business owner may have special needs that require an analysis of how best to plan for successor ownership. Yet another example might be a single person who has no financial family obligations. A very simple plan to pay final expenses and debts may suffice.

For the vast majority of prospects, such as married couples with or without children, and single parents, a typical needs analysis will address both cash needs at death and ongoing income needs of survivors. This section will address these situations.

Fact-Finding

To properly determine the type of analysis to use and subsequently to make recommendations, agents go through a process generally referred to as fact-finding. Dr. Tony Alessandra put it well when he said, "People don’t buy life insurance when they are made to understand. They buy life insurance when they feel understood." Good fact-finding helps people to "feel understood." To put it another way, agents have to conduct their interviews in such a way that prospects feel they can trust the agents’ motives for the recommendations being made. This is critical since agents do have a conflict of interest that is apparent to prospects. If a sale is consummated, agents earn a commission. If no sale is made, no commission is earned. Some "no commission" or "no load" life insurance is sold by financial planners and agents, who are typically compensated on a fee basis. However, these sales represent a tiny fraction of all life insurance sales.

Formula for Building Trust

My own formula for helping people "feel understood" and for building trusting relationships between prospects and agents is Q + 3L + 2R = TRUST. Let’s examine each element of the formula.

Q = QUESTION

The first and most important element in the process is asking questions. It is impossible to understand people’s needs and make appropriate recommendations in any other way.

There are two general categories about which questions are designed to elicit information: facts and feelings. Examples of factual information that is revealed are names, addresses, dates of birth, and assets and liabilities. While this information is important, even more significant are questions that indicate feelings, like What is your most important goal? How do you feel about your career? What is the most important thing to you in this world? How do you feel about your children’s education?

The best fact-finding techniques will intersperse "feeling-finding" questions with fact-finding questions. Asking questions in a respectful manner helps build trust.

The First L = LOOK

A critical element in building trust is to look into a person’s eyes. President Richard Nixon was often accused of having "shifty eyes." He was tragically also the only president in United States history to be forced to resign for lying to the American people. Even when a person doesn’t initially look back at the agent, it is critical for the agent to continue to look directly into a prospect’s eyes. As the interview progresses, eye contact will be made. Looking directly into someone’s eyes helps build trust.

The Second L = LEAN

Les Giblin, an outstanding sales consultant, advocates that the questioner lean slightly forward as a prospect responds to questions. This implies, "I’m so interested in what you’re saying that I’m hanging on every word." I adopted this technique many years ago and have found it to be an invaluable aid. Leaning helps build trust.

The Third L = LISTEN

All true professionals—doctors, lawyers, clergy, and life insurance salespersons—are good listeners. The famous sales motivator, Doug Edwards, put it more bluntly when he said, "After you ask a question, shut up."

Before its demise the investment firm of E.F. Hutton ran television commercials with the theme, "When E.F. Hutton talks, people listen." I always felt they had it backwards. In our office we have a different motto: "When people talk, we listen." Listening helps build trust.

The First R = RECORD

Picture yourself visiting a physician. You are one of many patients to be seen that day. The doctor asks you a number of questions, which you respond to after careful thought, but the doctor does not record the information. You probably wouldn’t look favorably on this technique. The fact-finding process is designed to elicit information to use in designing a plan. Prospects will know that what they are sharing will be used to make recommendations if agents record the information provided. Recording helps build trust.

The Second R = REINFORCE

Many times people will share positive aspects of their lives. For example, they may indicate that they enjoy their work or that they have been successful in their career. When this happens, we have an opportunity to compliment people by reinforcing their achievements. In such a situation I might typically say, "You are really fortunate that you enjoy your work. So many people I talk to hate to go to work." Reinforcing is yet another way to build trust.

The Gift of Listening

The Q + 3L + 2R = TRUST formula is effective because it helps agents become good listeners. A good listener is a person who cares about other people. One might even say that listening is an act of love for another human being. Unfortunately good listeners are a rarity in today’s society. We are all so involved with ourselves that we don’t take the time to listen to others. To illustrate the point, ask yourself the following two questions: When is the last time someone sat down with you, one on one, and allowed you to talk about yourself (the most important person in the world) for 30 minutes?

And the second question: Wouldn’t it feel good to have someone do that with you? I suspect the answer to the first question is "not in a long time." The answer to the second question is probably a resounding "yes." Agents doing thorough fact-finding, using Q + 3L + 2R, allow prospects to talk about themselves. A trusting relationship is the end result.

Needs Analysis

Once the fact-finding process is completed, an analysis of needs can commence. As indicated earlier, there are two types of needs this appendix will explore: cash needs and income needs. For illustrative purposes the explanation of the analysis that follows assumes a two-parent, two-income family with children. With slight modifications the analysis would be equally valid under a different family structure.

When an analysis is undertaken, it assumes death at the present time. The analysis is thus a snapshot of the current situation. Regular reviews occurring at least every other year are critical in order for the analysis to continue to be valid.

Although agents will usually provide suggested values for the needs being analyzed, it is vital that prospects either agree with those values or substitute values that more accurately represent their own desires. The completed analysis must, in all cases, represent clients’ wishes. Agents should never force their recommendations on prospects.

 

Cash Needs

There are six cash needs:

See table 1 at the end of this appendix for a completed cash-needs analysis.

Immediate Money Fund. The first cash need is an immediate money fund for bills presented after death. They may include

The amount required will vary widely from one situation to the next. Based on a study of estates completed by Dearborn Publishing, an amount equal to 50 percent of the higher wage earner’s income may be sufficient in the typical case. This same amount is recommended for both spouses. The amount may be exces- sive for people with high incomes, and low for those with smaller incomes. A calculation of federal and state death taxes will be required for those with large estates in order to determine the amount needed for the immediate money fund.

Debt Liquidation. Most people will want to assure that their debts are liquidated at the time of death. In the case of married couples where both spouses are working, insurance should normally be provided on both lives since their combined incomes are helping to pay off the debt while they are alive.

Emergency Fund. This fund is for unexpected bills not readily payable from current income, such as major repairs to the home or car, or medical expenses. The benefit to be provided is arbitrary. I normally recommend an amount equal to 50 percent of the annual income of the higher-income spouse. I also recommend that both spouses be covered for this amount since either survivor faces the same potential emergency costs.

Mortgage/Rent Payment Fund. Most clients want to provide for full payment of the outstanding mortgage. Even if the mortgage has terms favorable to the borrower, I normally recommend providing enough funds to pay the mortgage. My experience with survivors indicates that they feel better about their future if they own a debt-free home. Thus even when it doesn’t make economic sense to pay off the mortgage, it usually makes emotional sense because it provides peace of mind.

Many times an insurance policy can be arranged to provide a dual function. When permanent life insurance is utilized, the cash value can be used to pay off the mortgage before its maturity. The point at which cash values can accomplish the payoff is called the crossover point. This popular plan is known as a mortgage vanish or mortgage acceleration plan.

For those who don’t own a house or condominium, a rent payment fund can be provided. While the amount selected is arbitrary, I normally recommend a fund equal to 120 percent rent payments (made over 10 years). The fund can be used to help insulate the survivor from future rent increases or as a down payment on a house or condominium.

No one would own a home and not insure it against loss by fire. Yet the chances of loss by fire are small, while the chances of loss due to death or disability are substantial (see table 2 at the end of this appendix). I use table 2 to reinforce the need to provide insurance to cover the mortgage.

Child/Home Care Fund. The child/home care fund is provided to pay for new expense created as a result of the death of a spouse formerly performing these duties without any cash outlay. Examples of this type of expense are baby-sitting, laundry, cleaning, and home and car repairs. Normally benefits are provided until the youngest child is 18.

Cornell University did a study (see table 3) to determine the amount of these costs. The study indicates that the cost of replacing the female spouse’s services is usually substantially higher than replacing those of the male. A future study may well indicate that this gap has been overestimated since many male spouses in two-income homes perform tasks previously attended to by the female spouse. Under any circumstances the figures should be adjusted to reflect the unique aspects of a particular family’s situation.

Once the child/home care amount is established, a timing discount can be applied because death benefits would be paid immediately while the funds would be used over a period of years (see table 3 for an example).

Educational/Vocational Fund. This fund is designed to provide for children’s educational or vocational needs. The amount needed will vary depending on the types of schools being considered and the number of years of education planned. In the typical situation where 4 years of college are planned, parents will want to provide as a minimum the average cost of 4 years in a publicly supported college. Currently that cost is about $45,000 (as high as $120,000 for the most expensive private universities).

Although costs have been rising drastically, it is not necessary to consider future cost increases. Since the analysis assumes death at the present time, if in fact this occurs, the death proceeds can be invested until the children matriculate. The increasing value of the account should offset the increasing costs of education. As stated earlier, updating the plan on a regular basis is essential to assure that the amount provided continues to keep pace with inflation.

Capital Required. Once all the cash needs (of both spouses when applicable) are agreed upon, they are totaled. Next the existing life insurance (including group insurance but excluding accidental death benefits) and existing liquid assets are totaled, and the result is subtracted from the total cash need. Any deficiency is shown as additional capital required. Any surplus will be carried forward to the income-needs analysis.

Although social security does pay a maximum cash death benefit of $255, in the interest of simplicity I ignore this benefit in calculating the capital needs.

Income Needs. Once the cash needs are established, it is essential to analyze the family’s ongoing income needs. See table 4 of this appendix for an example of a completed income-needs analysis.

Income Objective. The first step in analyzing income needs is to determine the income objective after death. Typically a percentage of the present gross total family income is selected. While the percentage selected will vary, I have found 70 percent to be the most generally accepted number. A government study by the Bureau of Labor Statistics confirms the 70 percent objective as reasonable for those earning over $60,000 and for all two-income families. The objective can be reduced somewhat at lower income levels (see table 4). The objective selected should permit a family to maintain their customary standard of living. One must never forget that a luxury once enjoyed becomes a necessity.

Tax Considerations. The question often asked is, Should the income objective be based on gross or net income? The key to successful planning is to keep the analysis as simple as possible. Therefore when doing an analysis, I utilize gross income to calculate the income objective. When calculating the income provided to a beneficiary after death, I also use gross income. This "gross" to "gross" calculation is simple, quite accurate, and keeps the discussions focused on needs rather than taxes.

Social Security Benefits. Once the income objective is established, the existing sources of income are analyzed. The first of these is social security benefits. Calculation of the precise amount of benefits in any given situation is quite complicated, especially because benefits change from year to year based on changes in the consumer price index. Calculation is further complicated by frequent social security legislative changes.

My experience indicates that prospects are not interested in all the nuances of this complicated benefit. Thus to maintain simplicity I use a table that provides approximate benefits (see table 5). Subtracting the social security benefit from the income objective yields the preliminary income shortage.

Benefits are payable to a spouse aged 60 and over or to a spouse of any age if he or she is caring for a child who is under 16 or disabled. Benefits are payable to children who are under age 18 (under age 19 if in high school) or any age if continuously disabled since before age 22.

Other Incomes. The next step is to identify any other sources of income. The most common item in this category is the income of a working spouse. There may also be income provided by a pension plan or other employer-sponsored programs. Another source of income could be nonliquid assets such as rental property. A note of clarification should be written to help survivors understand which assets are intended to fund which needs and whether or not liquid assets are intended to be retained by the survivors. Once all other income is identified, the total is subtracted from the preliminary income shortage. The balance (if any) is the total annual income shortage.

Method of Providing Capital. The only way to satisfy the income shortage is to provide capital to the heirs. Life insurance is the only source of instant capital at death. There are two methods used to calculate the amount of life insurance required—the capital-liquidation method and the capital-retention method.

Capital-Liquidation Method. In the capital-liquidation method, a pool of capital is created, and over the surviving spouse’s lifetime this pool is liquidated. Normally at the spouse’s death no assets remain. Another version of this method is to liquidate the capital over a defined number of years. This method works well when children, but no spouse, are being provided for.

The advantage of capital liquidation over capital retention is that less capital is required. However, there are several disadvantages:

There are annuities that can be invested in equity accounts and may offset the effect of inflation by increasing income over the years. While this strategy may help, it will not solve the inflation problem because the amount in the account is being reduced every year as the annuity is paid out. Thus the investment gains diminish as the capital shrinks.

In spite of the foregoing data some advisers continue to recommend the capital-liquidation method. Typically the recommendation is to exhaust principal and interest over the person’s life expectancy. In my opinion this is not a sound recommendation. By definition half of us will outlive our life expectancy. Furthermore, life expectancy has increased and is expected to continue increasing in the years ahead. What this means is that 50 percent of beneficiaries will run out of money before they run out of time. If the liquidation method is to be used at all, it must be designed to provide income to an age the beneficiary is not likely to outlive.

Capital-Retention Method. In the capital-retention method the amount of capital required is calculated assuming that only the income is utilized. To accomplish this, the income shortage is divided by the assumed interest rate and the result is the capital required. Any shortage of capital from the cash-needs analysis is added to this amount to arrive at the total new capital required. If there is a surplus of capital carried forward from cash needs, it is subtracted to arrive at the new capital required.

One of the critical factors in arriving at the amount of new capital required is the assumed interest rate. Although capital properly invested in a balanced portfolio may yield an annual return of as much as 10 percent, I usually recommend that the assumed interest rate be 4 percent.

If only 4 percent of the earnings is used, any excess can be added to the capital. This will cause the capital to grow each year. Table 8, which assumes earnings growth of 10 percent, shows how the growing fund will make the beneficiary’s income inflation-proof. For example, at the end of 10 years usable income has gone from $4,000 to $6,800, precisely the amount required to keep pace with inflation.

The assumed interest rate can be calculated as follows:

Expected rate of return 10%

Rate of inflation –  6%

Usable family income 4%

The calculation is not foolproof. No one can accurately predict rates of return, inflation rates, and the effect of income taxes. I find, however, that prospects readily accept the validity of the concept.

The disadvantages of the capital-liquidation method were itemized earlier. The capital-retention method, used properly, overcomes those disadvantages to a significant degree. A personal experience will help illustrate the point. My father died at the age of 78 and left a substantial estate to my mother, who was then 72. My mother was able to live comfortably on the income provided, but she developed Parkinson’s disease, making it necessary for her to go into a nursing home at the age of 85.

My mother was a very proud person. Her one request on entering the nursing home was that she have a private room, which cost $50,000 annually. As her Parkinson’s progressed, she became depressed. It was concluded that she would benefit from help during the day. The cost of an aide for 6 hours a day was $50,000 annually, increasing the total cost per year to $100,000. Her capital was being drained rapidly.

The demeaning circumstances she found herself in were a heavy burden. The only thing she still had going was a sense of pride in paying for her care. Her great fear was that if she could no longer pay these expenses, she would lose her aide and her private room and become dependent on medicaid. Each time I went to visit her she had one question: "How is my money holding out?" I assured her that if she ran out, I would be able to assume her continuing care. "No!" she said emphatically, and then asked again, "How is my money holding out?"

At her death a small amount of capital remained. Had she lived much longer, she would have run out of money before she ran out of time. This personal story reinforces my belief that significant amounts of capital may be required well into our late 80s and 90s in order to satisfy the needs of life.

Complications of Income-Needs Analysis. An analysis of income needs requires an awareness of the possibility of several other adjustments.

Blackout Period. In the analysis we have reviewed thus far, no adjustment has been made for the loss of social security benefits that normally occurs when the youngest child leaves home. This period is referred to as the blackout period. Moreover, the analysis does not demonstrate the resumption of a benefit for a surviving spouse after age 60. (These omissions are covered in a footnote in table 4.)

Keeping it simple is the reason for not including these calculations. The danger of providing so much information that prospects become confused and take no action is very real. Thus for most prospects I do not calculate the additional insurance required to cover the blackout period. However, in the total income analysis in table 9 the total need, including the capital required to replace social security during the blackout period, is considered.

Resumption of Social Security Benefits. Yet another complication is that there is a resumption of social security benefits when the spouse of a deceased reaches age 60. Since this calculation is extremely complex, I never include it in the plan. The logic behind this is that even though the capital-retention method is used, it will be difficult to make the plan fully inflation-proof. The extra benefits social security provides at age 60 will be a welcome inflation-fighting addition for the beneficiary.

Purchase of Life Insurance. Establishing the amount of insurance needed is more important than selecting the type of policy. Once the need has been established, prospects will require help in selecting the type of life insurance.

There are three main factors that influence the selection of the appropriate policy or combination of policies:

Unfortunately it will not always be easy to formulate a solution that provides for all the prospect’s objectives. For example, clients may wish to utilize the cash values of permanent insurance to provide for retirement benefits. Yet the need for life insurance may be so great that the amount of premium available will only purchase term insurance. Unfortunately this type of situation is a rather common occurrence. The continuing evolvement of new policies and combinations of policies has helped to alleviate the problem to a significant degree, but the problem persists.

In my opinion, in most cases protection needs should be satisfied first because death can occur at any moment. On the other hand, there is usually time to satisfy accumulation and retirement objectives.

It is not always easy to convince prospects to proceed in this manner. Accumulating money for future use is a lot more pleasant than paying premiums that will only provide a benefit upon death. Nevertheless, a professional life insurance agent must make every effort to cover clients’ cash and income needs fully.

Regular Reviews

I mentioned earlier that not only is it important for clients to purchase the required insurance, but it is equally critical to review and update the plan regularly.

Many developments, such as changes in assets and liabilities and composition of income and family, may require updating the program. Another major factor is inflation. One of the first questions I ask prospects, when reviewing their program, is, "When did you buy your last insurance?" Let’s assume the answer is 5 years ago. I then ask, "I assume you felt your program was adequate at that time?" The response is usually positive. I then point out that based on inflation alone, they need to increase their insurance by a given percentage. Table 10 illustrates the problem. I then complete a new needs analysis to determine the actual new insurance required.

Settling the Death Claim

Settlement options and trusts are covered elsewhere in this book. However, in closing this section I want to add a few words based on my 40 years’ experience in settling death claims.

When there are substantial amounts of capital (insurance and other assets) in an estate, the best results are achieved when clients utilize an inter vivos life insurance trust as the beneficiary of these assets. The trust provides an opportunity for flexibility and investment expertise while also safeguarding the assets from unwise dissipation by beneficiaries.

In view of relatively low guaranteed rates of return, settlement options in life insurance contracts have historically been perceived to be an unattractive choice for beneficiaries. As a result they have been utilized in a very small percentage of cases.

In recent years companies have responded with more attractive programs. In some cases these programs operate much as a money market fund in which checks can be drawn against balances left with the insurance company to earn interest.

Also if a company’s settlement options are not competitive, agents should explore the possibility of having a beneficiary purchase an annuity at more competitive rates.

IN SUMMARY

A professional life insurance agent has the opportunity of providing substantial benefits to a prospective client. A thorough fact-finding interview will reveal prospects’ needs. By completing both the cash-needs and income-needs analyses, the agent can determine the new capital required. While prospects will usually not be eager to purchase the required insurance, a skillful agent will be able to convince prospects of the importance of taking action immediately. Once a plan has been established, agents must offer to review and update the plan regularly.

Note: The 10 tables that follow are reprinted with the permission of Wolff-Zacklin & Associates, copyright Vernon Publishing, Inc. 1992. All rights reserved.

TABLE 1

 

CASH NEEDS

    Joe    

   Donna   

Immediate Money Fund

This fund is for the bills presented after death, which will have to be paid. They may include:

  • Medical and hospital expenses
  • Burial expenses
  • Attorney’s/Executor’s fees
  • Federal Estate Taxes
  • State death taxes
  • Probate court costs
  • $ 17,500   

    $ 17,500 

    50% of the higher wage earner’s annual income may be sufficient.1

    Debt Liquidation

  • Total of installment credit
  • Unpaid notes
  • School and auto loans
  • Outstanding bills
  • $ 3,000   

    $ 3,000 *

    Emergency Fund

    This fund is for unexpected bills not readily payable from current income. Such things as: major repairs to the home or automobile, medical emergencies, etc.

    $ 17,500   

    $ 17,500 *

    50% of the higher wage earner’s annual income may be sufficient.

    Mortgage/Rent Payment Fund

    What would it take to pay your mortgage off today?

    or

    What amount is sufficient for a ten-year rent fund?

    Monthly rent $_____________ x 120 mo. = $ ________

    $ 60,000   

    $ 60,000 *

    Child/Home Care Fund

    To pay for new expenses created as a result of the death of a spouse formerly performing these duties without any cash outlay.

    You:2 Amount per year $ 3,100 x 4.8  = $ 14,880

    Factor is 4.8

    Spouse: Amount per year $ 12,100 x 4.8 = $ 58,080

    Factor is 4.8

    $ 14,880    

    $ 58,080 

    Educational/Vocational Fund

    The cost of a four-year undergraduate education or comparable vocational training will vary by state and type of school.

     

    $ 45,000   

     

    $ 45,000  *

    $45,000 per child is usually the minimum that should be provided

       
     

    Subtotal

    $ 157,880   

    $ 201,080 

     

    Total of current savings, other liquid assets and existing life insurance

    –$ 65,000   

    – $ 35,000 

     

    New capital required

    $ 92,880 (A)

    $ 166,080 (B)

    1Estates in excess of $600,000 (the Unified Credit Equivalent) may have larger expenses.
    2For appropriate annual amount on both spouses see table "What is the Economic Value of the Work We Do at Home?"
    3Assuming a 7% rate of return.
    4Discount factors used because funds available at death are used over a period of years.
    * Applies only if spouse is employed.
    Copyright © Vernon Publishing, Inc., 1992 — All Rights Reserved

    TABLE 2

    Our Home —
    the largest investment
    most of us make

    We all insure it against the loss by fire, yet the chance of a total loss by fire is only 1 out of 100. However, the chance of loss due to death or disability before paying off a mortgage is much greater!

     

    Age

    Chance of Death Within   15 Years  

    Chance if Disability Within   15 Years  

    Chance of Death Within   30 Years  

    Chance of Disability Within   30 Years  

     
                 
     

    20

    25

    30

    35

    40

    45

    50

    1 in 37

    1 in 34

    1 in 26

    1 in 18

    1 in 12

    1 in 8

    1 in 5

    1 in 14

    1 in 12

    1 in 10

    1 in 8

    1 in 6

    1 in 5

    1 in 5

    1 in 12

    1 in 9

    1 in 6

    1 in 4

    1 in 3

    1 in 2

    1 in 2

    1 in 8

    1 in 7

    1 in 6

    1 in 4

    1 in 3

    1 in 2

    Almost Certain

     
     

    Doesn’t it make sense to
    insure these risks as well?

     

     
     

    Source: 1980 Commissioners Standard Ordinary Mortality Table and 1985 Commissioners Disability Table Definition of disability: 90 days or more

     

    TABLE 3

    What Is the Economic Value
    of the Work We Do at Home?

    According to a recent Cornell University study, the following are the average annual dollar values of duties performed at home:

     

    Number of Children

    Both Spouses Working

     

    One Spouse Working Outside the Home

     
       

    Husband

      Wife  

     

    Working  Spouse 

    Non-Working  Spouse 

     
                   
     

    1

    2

    3

    or more

    $3,100

    $4,150

    $4,850

    $12,100

    $13,850

    $15,600

     

    $2,750

    $3,800

    $4,500

    $16,650

    $19,050

    $20,800

     
     

    To determine the amount of capital that may be required to offfset the economic loss a death would create, multiply the applicable number in the table by the appropriate factor below.

     

     
     

    Source: Bulletin 60, New York State College of Human Ecology, Cornell University, Ithaca, N.Y., updated through August 1992. Discount factors used because funds that become available at death are used over a period of years.

     

     

    TABLE 4

    INCOME NEEDS1

    For Donna in the event of Joe’s death

    INCOME OBJECTIVE:

    Based on a government study by the Bureau of Labor Statistics2, the following are typical income objectives in order to permit a family to "remain in their own world" after the death of a wage earner. Assumption is the mortgage on residence is paid, or a rent fund has been established, and educational expenses are provided for separately.

     

    Annual Gross Income

    Percentage of Gross Income Required

    Up to $44,000

    $44,001 to $49,000

    $49,001 to $54,000

    $54,001 to $60,000

    Over $60,000

     

    Two Income Families3

    (At all income levels)

       

    70%

    66%

    63%

    60%

    57%

    70%

    Present Income (all income of both wage earners)

     

    $ 60,000

    Income objective ( 70 % of above)

    $ 42,000

     

    Average annual Social Security4

    $ 9,500

     

    Preliminary income shortage

    $ 32,500

     

    Other income (if any)

    – $ 25,000

     

    Total annual income shortage

     

    $ 7,500

     

    Amount of capital required to
    provide this income
    ($ 7,500   ÷     4    %)

    Annual income Assumed Interest

    Shortage Rate

     

    $ 187,500

    Cash needs requirement

     

    $ 92,880

    Total new capital required

     

    $ 280,380

    1 Use a separate worksheet to calculate the Income Needs of each wage earner if desired.

    2 Source: Bureau of Labor Statistics Consumer Expenditures Survey; updated with Bureau of Labor Statistics Consumer Price Index through 5/91.

    3 The study found two-income households outspend their one-earner counterparts. Therefore, if both spouses are presently working, 70% of their Total Gross Income should be provided regardless of the Income Level.

    4 Only available until youngest child reaches age 18, unless beneficiary is over age 60. See Social Security Table. Use another worksheet to calculate the Income Needs during the blackout period if desired.

    Copyright © Vernon Publishing, Inc., 1992 — All Rights Reserved

     

    TABLE 5

    Social Security Survivorship
    Benefits

     


    Facts about
    deceased1

     

    Average annual
    benefit if
    surviving spouse is not employed


    Average annual benefit if surviving spouse is employed2

     
     


    Age

    Approximate annual earnings

     


    1 child

    2 or more children


    1 child


    2 children

    3 or more children

     
     

    63–67

    $58,000 or more

    45,000

    35,000

    25,000

     

     

    $20,300

    19,400

    18,400

    15,300

    $23,700

    22,700

    21,500

    18,400

    $10,200

    9,700

    9,200

    7,700

    $20,300

    19,400

    18,400

    15,300

    $23,700

    22,700

    21,500

    18,400

     
     

    51–62

    $58,000 or more

    45,000

    35,000

    25,000

     

     

    $20,700

    19,700

    18,600

    15,300

    $24,100

    23,000

    21,600

    18,400

    $10,300

    9,800

    9,300

    7,600

    $20,700

    19,700

    18,600

    15,300

    $24,100

    23,000

    21,600

    18,400

     
     

    41–50

    $58,000 or more

    45,000

    35,000

    25,000

     

     

    $22,200

    20,700

    18,900

    15,300

    $25,900

    24,100

    22,000

    18,400

    $11,100

    10,400

    9,500

    7,600

    $22,200

    20,700

    18,900

    15,300

    $25,900

    24,100

    22,000

    18,400

     
     

    31–40

    $58,000 or more

    45,000

    35,000

    25,000

     

     

    $23,500

    21,000

    18,900

    15,300

    $27,400

    24,500

    22,100

    18,400

    $11,700

    10,500

    9,500

    7,700

    $23,500

    21,000

    18,900

    15,300

    $27,400

    24,500

    22,100

    18,400

     
     

    30 or under

    $58,000 or more

    45,000

    35,000

    25,000

     

     

    23,900

    21,100

    19,000

    15,500

    $27,900

    24,700

    22,200

    18,600

    $11,900

    10,600

    9,500

    7,700

    $23,900

    21,100

    19,000

    15,500

    $27,900

    24,700

    22,200

    18,600

     

    1 If earnings are not shown, use nearest amount illustrated. Actual benefits will depend upon wage history and actual age. Assumes death in January 1993.

    2 Assumes full-time employment. If surviving spouse is not employed full-time, somewhat larger benefits may be available for the one child and two children situations.

    Benefits are payable to a spouse age 60 and over, or any age if caring for a child who is under 16 or disabled. Benefits are payable to children who are under age 18, or who are under age 19 if in high school, or who are any age if disabled before 22.

    TABLE 6

    Impact of Inflation —

    The 20-year average annual inflation
    rate has been 6%1

    There are only two ways to guard against inflation:

    1. People at work

    2. Money at work

    You can hedge against inflation
    by retaining capital (money at work).

    1Source: U.S. Department of Labor, Bureau of Labor Statistics, Consumer Price Index 1971–1991

     

    TABLE 7

    How much capital is
    needed to pay a survivor
    $7,000 per year?

    Using principal and interest

     

     

    Age of survivor

    Approximate life expectancy

    Using principal and interest @ 7%

     
     

    30

    35

    40

    45

    50

    50 Years

    45 Years

    40 Years

    35 Years

    30 Years

    $96,600

    95,200

    93,300

    90,800

    86,900

     

     

     

    If survivors live beyond life expectancy
    they will have no further income.

    Using interest only

    1. $100,000 @ 7% will provide $7,000 annually.

    2. The $7,000 will be provided regardless of how long a survivor lives and the $100,000 will pass to the heirs.

    TABLE 8

    Money At Work—

    The Inflation Offset

    Subsequent Years

     

     


    Years


    Capital


    Income


    Living Expenses

    Inflation Offset

     
     

    5

    10

    15

    20

    $126,000

    170,000

    226,000

    302,500

    $12,600

    17,000

    22,600

    30,250

    $ 5,040

    6,800

    9,040

    12,100

    $ 7,560

    10,200

    13,560

    18,150

     

    TABLE 9

    TOTAL INCOME ANALYSIS

    New Capital Required During Child Rearing Period

     

    $ 280,380

    Income Objective After Child Rearing Period ( 60 %)
    (See Below)

    $ 36,000

     

    Social Security only available until youngest child reaches age 16, thus income will be reduced 4
    years from now to Total of other income and annual income shortage.

    $ 32,500

     

    Income Shortage After Child Rearing Period

    $ 3,500

     

    New Capital Required ($ 3,500 + 4.0 )
    Income Shortage Assumed Interest

    Rate

    $ 87,500

     

    Amount of Capital Required today to Equal $ 87,500
    in
    4 years ( $87,500 x .855 )

    New Capital Discount
    Required Factor

     

    $ 74,810

    Total New Capital Required

     

    $ 355,190

     

    Percentage of Gross Income Required

    Years Until
    Youngest Child

    Discount Factors1

     
     

    Annual Gross Income

    Children Gone

    Reaches 18

    4%

    5%

    6%

     
     

    Up to $44,000

    $44,001 to $49,000

    $49,001 to $54,000

    $54,001 to $60,000

    Over $60,000

    Two Income Families1

    (At all Income Levels)

    60%

    55%


    51%


    48%


    45%

    60%

    1

    2

    3

    4

    5

    6

    7

    8

    9

    10

    11

    12

    13

    14

    15

    16

    .982

    .625

    .889

    .855

    .822

    .790

    .760

    .731

    .703

    .676

    .650

    .625

    .601

    .577

    .555

    .534

    .952

    .907

    .864

    .823

    .784

    .746

    .711

    .677

    .645

    .614

    .585

    .557

    .530

    .505

    .481

    .458

    .943

    .890

    .840

    .792

    .747

    .705

    .665

    .627

    .592

    .558

    .527

    .497

    .469

    .442

    .417

    .394

     

    1 A Bureau of Labor Statistics study found two-income households outspend their one-earner counterparts. Therefore, if both spouses are presently working, 60% of their Total Gross Income should be provided regardless of the Income Level.

     

    TABLE 10

    Is Your Life Insurance
    Adequate?

     

    Year of Last
    Insurance
    Review

    Assumed Amount
    of Life Insurance
    Owned

    Amount of Life Insurance Required in 1993 to Provide the Same Benefits

    Percentage Increase Required1

           

    1983

    1984

    1985

    1986

    1987

    1988

    1989

    1990

    1991

    1992

     

    $100,000

    100,000

    100,000

    100,000

    100,000

    100,000

    100,000

    100,000

    100,000

    100,000

    $145,000

    140,000

    135,000

    130,000

    128,000

    123,000

    118,000

    112,000

    106,000

    103,000

    45%

    40%

    35%

    30%

    28%

    23%

    18%

    12%

    6%

    3%

     

    1Source: U.S. Department of Labor Bureau of Labor Statistics—1982–1992

     

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