When choosing a life insurance policy for your clients, one important thing to consider is how much they will need. Someone who is retired may not need as much as someone who is raising a young family. There are different ways to calculate life insurance coverage based on your clients' circumstances.
Here are three questions to ask your clients so that you can figure out how much life insurance they need.
- How many dependents do you have?
It is generally advised that the amount of life insurance should be at least 10 times your clients’ current income. This figure may need to be even more when you factor in your clients’ mortgage, future childcare expenses, and other debts.
After you have calculated a specific number, some experts recommend that you also add at least $100,000 in coverage per child. The goal is for there to be a high enough death benefit to help support your clients’ families for multiple years and help take care of their end-of-life expenses.
The more children your clients have, and the younger they are, the higher their life insurance might need to be. If they have ageing parents or other elderly relatives they are caring for, you may want to factor that into your life insurance calculation for them as well.
- How long do you need the coverage?
Term life insurance offers insurance coverage for a certain amount of time, such as 5, 10, 20, or 30 years. The length of the term should be long enough to help cover your client’s financial obligations, but it also should not be so long that they are paying for coverage that they do not need.
For clients with young children, it might be smart to get 20 years of coverage. This would provide enough time for your client’s children to be financially independent by the end of their term limit when they no longer need the coverage.
If your clients are parents to older teens, they may only need a 5-to-10-year term limit.
For clients close to elderly age, they might only be able to get a 10- or 20-year term coverage.
One of the benefits of longer coverage is that the rates are lower, especially if your clients get insurance when they are young. If at any point they have less or no more need for the coverage, they could lower the coverage amount to decrease the premiums or cancel the policy. The cancellation of the policy may not lead to any penalties.
In some cases, a permanent life insurance option may be more suitable for your clients. It is worth considering this option if your clients have disabled children or ageing parents that need lifelong care, or if they want to leave a trust for their heirs.
- How much debt and savings do you have?
Your clients may have enough in savings to cover some expenses such as funeral costs or medical bills. In such cases, they will not need as much life insurance, especially if they have no dependents.
However, if they have an extensive amount of debt, such as student loans, car loans, or a mortgage, then they may need a higher life insurance plan.
Once you figure out the answer to these three questions, you can better give advice on how much life insurance is best for your clients based on their circumstances and stage in life.
This is an abridged version of an article that appeared in Big News Network.