By Dave Beck
Partner, Insurance Agent
Egan, Berger & Weiner, LLC
I was talking to my 3-year-old grandaughter the other day, and she told me that she needed to go outside and play. When I explained that she didn’t need to go outside, but rather wanted to, the distinction was lost on her. Don’t get me wrong. I understand; she is 3.
But our conversation did get me thinking about the difference between needs and wants and the many discussions I’ve had with clients this year about their insurance needs.
Many of us think about insurance as a necessary evil, something that we must have, but don’t really want to spend money on. For example:
- We have homeowner’s insurance because our mortgage company mandates it.
- We have auto coverage because the state requires it.
- Now we have to have health insurance because the Affordable Care Act penalizes us if we don’t.
What about life insurance? You don’t have to have it, so should you? And if so, why?
The good news is that there is a quick way to determine whether or not you need life insurance.
Simply answer this question: If I were to die today, who would lose (their house, their college education, etc.)?
If the answer to that question is no one, then you have no need for life insurance.
If there is someone who might suffer financially upon your passing, you might have a need for life insurance.
Now that you have the answer, here are three points to consider.
1. Life insurance shouldn’t make you worth more dead than alive. If someone you love will lose something significant when you die, you will need to figure out how to quantify the amount they’ll need. This is where your insurance professional comes in. I have been told countless times by clients and prospective clients that they are worth more dead than alive. If that is truly the case, the insurance planning has gone terribly wrong.
2. It’s not about giving your survivors a life of luxury. When I was first starting out in the insurance industry 30 years ago, I had a manager who said that we were in the “estate creation” business. At the time, I didn’t question his assertion. But as I consider it now, I believe nothing could be further from the truth. The insurance industry should not be focused on enhancing anyone’s lifestyle by the death of another (hasn’t almost every crime series made a large life insurance policy the motive for murder at least once?). Instead, our job should be to help our clients be properly insured so that their survivors can maintain their lifestyle.
3. Too little insurance is just as big a problem as too much. While your life insurance goals needn’t be to enable your survivors never to have to work again, at the same time, appropriate insurance planning does not, in effect, mandate a reduction in survivors’ lifestyles by encouraging clients to purchase too little life insurance. People are naturally wary of insurance agents who exaggerate the client’s need for insurance for the sake of a larger sale. But clients are also not served well by agents who underestimate the true need (so that the premiums are lower) because they are afraid of losing a sale. In these situations, they show the client what makes the client comfortable as opposed to what the client truly needs. When agents encourage clients to buy either too much or little insurance, clients don’t get what they need, but rather what the agent wants — and that is simply unethical.
So what constitutes a need for life insurance?
In every one of the situations listed below, those left behind will experience a financial loss at the death of the insured, so the need is clear and identifiable. Keep in mind that this list is not comprehensive!
- death of a wage-earner who is still working
- a special needs child
- estate tax planning
- business uses of life insurance such as buy-sell agreements
- estate equalization for closely held family businesses
- loss of pension income when the annuitant dies, and/or
- insurance for a stay-at-home parent while children are young and incapable of caring for themselves.
As long as life insurance planning focuses on a needs-based model, then the decisions about whether or not to purchase life insurance, and how much to purchase, should be simple.
What if you want to buy more insurance than your insurance agent believes is needed?
While it’s not the norm, a number of times I have had clients tell me they want to purchase enough insurance to ensure that the beneficiary would never have to work again. While that’s a nice sentiment, it would be unethical (and perhaps illegal) for me to agree to sell insurance in that manner.
Most insurance companies have financial guidelines in place that limit insurance to some multiple of income unless you can show the underwriter why you need an exception to their rule.
More typically, clients would like me to tell them that their insurance coverage is fine — or if they need more insurance, it won’t too cost much.
I have no control over the first (your needs) and only some control over the second (through plan design and company selection). In the end, your need for life insurance will be determined by your financial plan and goals, and that really applies to all types of insurance.
My wish for you and your family is that you have what you need and get what you want. Happy New Year!
Questions? Send me an email at firstname.lastname@example.org
About Dave Beck
- Partner of Egan, Berger & Weiner, LLC
- More than 26 years in the financial services industry, with a primary focus on insurance planning
- More than 15 years of experience working for two of the largest insurers in the United States
- Six years as the principal in a private insurance agency
- Graduate of George Mason University, with a BS in business marketing and a minor in economics
Beck now resides in Woodbridge with Linda, his wife of 24 years, and their three children: Brian, Nicole, and Michael. A former high school athlete, he plays softball and ice hockey in local leagues. Beck grew up in Springfield, VA, and is a staunch supporter of the Redskins, Capitals, and Wizards.