Friday, February 12, 2010

How Much Do You (Really) Need?

Recently a client asked me about increasing his life insurance coverage. As a retiree, his former employer had offered him the opportunity to purchase additional group term life coverage. I have some reservations about Group Term Life (GTL) in general, but that's another post. Suffice it to say that it offers a seemingly inexpensive way to buy more life insurance, which is a good thing.

Or is it?

Let's step back and look at what this offer really means.

First, some facts about the GTL plan offered to - let's call him Sam. Sam's in his early 60's, quite healthy and active. The plan he was offered was for $50,000 of group term insurance on a guaranteed issue basis (i.e. no medical questions, he can't be turned down). The initial rate would increase by about 50% per thousand dollars of coverage once he hit age 65. Sam asked if I could offer something comparable.

I replied that I would be happy to look around for him, but that I wasn't aware of any carrier that would offer him a guaranteed issue plan such as this one on an individual basis. At the very least, there would be some health questions. I also pointed out that the flip side of this is that, since the GTL plan takes everyone, regardless of their health, it should be easy to find a less expensive alternative; certainly one that didn't double its rates in less than five years.

Sam responded by telling me that the GTL rates increase again at age 70 by about two and a half times, while the benefit itself decreased by half. Ouch! As he pointed out, "so $50,000 of coverage costs 2.5 times as much at age 70 and results in only $25,000 of coverage. Not a great deal!"

Not much one can add to that.

But that still wasn't the most important point Sam made. In the very next sentence, he hit the nail squarely on the head: "You know the real question is how much coverage do you need? If I were to pass away today, the coverage we have is adequate to cover all of our debt. That would leave [my wife] with her current income, her pension when she retires, my social security survivor benefits, her social security, my pension survivor benefits ... and our savings/investments."

And that's the $64,000 question: How much life insurance does one need?

It's often considered blasphemy to state that a client (or potential client) has "enough life insurance," but I think that, rare as it may be, some folks do, in fact, have "enough." As agents, we're always tempted to suggest more, but the reality is that there really is a point at which it's just not necessary. For my more mature (isn't that so much nicer than "older?") clients, I suggest looking at all the things Sam mentioned, plus whatever final expenses might be, and whether or not there's a need to cover estate planning issues. And take a look at your current policies to see if they're sufficient - they may well be.

Of course, the other side of that coin is that I've never had someone reject a claim check because his/her spouse had "too much insurance, and I really don't need or want any more money."

In the event, Sam's still trying to decide whether or not he needs additional coverage. Whatever the outcome, he's done himself (and perhaps others) a real service by asking that most important question.
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