Thoughts on Life Insurance

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Mr. Harrington is also a Partner in Harrington, Carbone & Allison, LLP (a Texas CPA Firm)

Please note: Any life insurance should be integrated into an overall estate plan.



Please Note:

Any life insurance should be integrated into an overall estate plan


Some Thoughts on Life Insurance

Overwhelmingly, life insurance is the primary funding mechanism in the event of death.  This particularly is the case when you die before age 55.  

And the sad truth is most people DO NOT have enough resources to assist the loved ones they leave behind.  Usually, there is a financial  tragedy that occurs after your death.  In most cases, life insurance can meet your goal to prevent this.       

First, I want to make sure you understand I do not sell life insurance nor do I hold an interest in a professional firm that does.  We sell only time in a fiduciary relationship with our clients.  So I have no "skin in the game" on the subject.  I am largely a consumer of life insurance like most people. 

I am reminded of when I sought to marry my wife and inquired as to what would be an appropriate amount to spend on a wedding ring.  When I looked to the  jewelry industry -- yes, they were on the higher side -- obviously because they were selling the ring.

Second, I have never meet a recent widow who indicated that the proceeds for them to make do with after the loved one had left this earth was too much.  In other words, most of the time the sad truth --- it is not enough.  People do NOT fully plan for their demise.  That is particularly true when the individual leaves early, was the primary breadwinner, they have a couple of kids to yet raise, and retirement for the remaining spouse is still looming.

A lot of factors need to be considered.  The earnings and spending habits of the parties, the number of children, the overall net worth of the parties available to meet needs outside of insurance, etc.

I have provided some information below that I received at a recent seminar.  I do not believe the table is too far off.  The fact that it is "tiered" is an indication that as you get older -- the less people are depending on you and hopefully your assets have gone up and your liabilities have gone down -- thus your net worth has risen.  

What kind of life insurance to get if it's needed?  You can certainly get lost in the maze of different products out there.  Term, universal, variable, whole, etc. 

Rather than the product selection--I would focus on one thing alone -- considering all resources available (life insurance, retirement, net worth (all your assets less all your liabilities) will it be enough?  If you ensure that is addressed -- you accomplished the goal.  Think long and hard on the impact of you leaving this earth on the individuals that are currently relying on you.  You want your death to be a financial disaster?

While every situation is unique, I believe 7- 10 years of income is on the lower end of the range and believe the table below is more financially honest as a simple rule of thumb. That's the real problem with "rules of thumb" -- blunt, "one-size fits all" instruments.

It all comes down to this - will it be enough based on your unique situation.  Will you provide for your loved ones in the event you die or not.  

More on Life Insurance

The primary reason to purchase life insurance is to replace loss of income needed to meet the survivors' ongoing expenses. A portion of the whole life premium, paid when due, funds this death benefit. But how do we determine how much is enough?  There are many different philosophies and formulas that can be applied, but the two most common approaches are Capital Needs Analysis (CNA) and Human Life Value (HLV).

Capital Needs Analysis budgets for current and anticipated expenses, and takes into account other income sources as well as projections on what costs such as Health Care could amount to in the future.  The analysis will tally expenses, including a factor for inflation, calculate the present value using a conservative rate of return, then offset that by existing assets.  Ultimately, the net number produced reflects the amount of life insurance believed to be needed to support survivors.

Human Life Value (HLV) evaluates the economic life of the decedent - the monetary total of all that he or she would have produced and accumulated in a lifetime, thus the method reflects earnings potential and is not cost-based. It is similar to the formulas used to calculate and claim damages under a wrongful death suit, the theory being that the survivors are entitled to the economic value of what the deceased would have produced during a lifetime.  For example, a 33-year-old earning $100,000 and working to age 70 might earn a total of $10 million, including 5% annual raises and not discounted for the time value of money.

A recent LIMRA International study portrays a sizeable gap between needs and the coverage people have purchased -and that 28% of the wives and 15% of the husbands in the study had no life insurance at all.  Experts recommend that coverage is sufficient to replace 7- I 0 years of income (Life Inusrance Consumer Studies, LIMRA International).  Human Life Values at different ages can be estimated from a simple underwriting guideline frequently used by life insurance companies to determine the proper amount of coverage:


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