How much life insurance do I need? 6 steps that will help your clients decide

By Sheryl J. Moore

Moore Market Intelligence


Now, I’ve never gone through the process of a needs assessment with a prospect, despite my position as a licensed life insurance agent. I’ve never sold a case in the nearly 15 years that I’ve worked in the life insurance industry. In order to maintain my credibility as a third-party expert in this industry, I choose not to sell. I need to be able to stand by the statement that “I do not endorse any company or product.”

That being said, the following is my take on how to assess the amount of life insurance one needs, and what products should be covering those needs. This discussion is intended only to give a general, high-level overview of a life insurance needs assessment. (And by all means, if you disagree with this self-taught theory, point out my mistakes!)

1. Identify all of the items that an individual needs life insurance to cover:
  • Burial/cremation expenses

  • Leaving a legacy to loved ones

  • Leaving a legacy to a charitable organization

  • Replacing the income of a spouse due to untimely death

  • Covering children’s education expenses

  • Paying-off credit card debt, student loans, mortgages and other debts

  • Ensuring the continuation of a business due to untimely death

  • Other financial commitments — insert obligation here: ______________
2. Identify the dollar amounts that should be allocated to each item above.

3. Write down the amount of life insurance needed for each line item on your list, so that you can tally-up the total amount of life insurance that should be purchased:
  • You may allocate $15,000 plus a cost-of-living adjustment (COLA) for burial expenses (Tip: COLAs are important because today’s dollar will be worth far less than 100 pennies 10 years from now)

  • You might want to leave a total of $250,000 to your loved ones

  • Your desire may be to leave $50,000 to your favorite charity

  • If you are like the typical American, you’ll want to put aside $43,000 annually, along with a COLA for the number of years from your current age until your planned retirement age, to replace your income (i.e. planned retirement age is 67 and current age is 37, so multiply $43,000 plus COLA times 30). This will help to ensure that your family can continue with their current standard of living, despite a possible untimely death.

  • Continue this exercise until you have calculated the amount of life insurance necessary for every item on the list
4. Review each commitment on the list and identify which of two camps the commitment belongs in: temporary or permanent. Temporary commitments will eventually go away (i.e. a mortgage loan is paid-off after 30 years) and permanent obligations will always exist (i.e. burial expenses).
5. Sum the total amount of life insurance needed for the temporary commitments — this is the amount of term life insurance that you should purchase.
  • Term life insurance can generally be purchased as a stand-alone policy in durations of one, 10, 20, and 30-year terms; make sure the duration of the term policy purchased matches the duration of the temporary commitments from above.

  • Term life insurance can also be purchased as an optional rider on a cash value life insurance policy
6. Sum the total amount of life insurance needed for the permanent commitments. This is the amount of permanent cash value life insurance that you should purchase.

There are several types of permanent cash value life insurance, with the two primary types being whole life and universal life
  • In general, whole life is more costly, but has stronger guaranteed cash values; it is also very structured and relatively inflexible in terms of changing coverage amounts and premium payments.

  • In comparison, universal life (UL) is less costly and more flexible; there are several varieties of universal life, including fixed UL, indexed UL, and variable UL
Not that complicated, is it? Maybe if this type of information was distributed to prospects for life insurance, they’d actually realize that they need life insurance. Heck, they may even start researching before seeking out the assistance of a qualified life insurance professional.

Imagine how much simpler the sale would be if you started with an educated prospect. What a novel concept!