How much life and disability is enough?

What to consider when helping clients sufficiently insure their most significant asset

Veronica is a 33-year-old professional with a family, earning $150,000 a year. If she works until 75, she’ll earn between $13 million and $20 million over 42 years (with 3% to 5% average annual increases). Veronica’s human life value will be her most valuable asset. I was surprised she had only $50,000 of group term life and $1,000 a month of short-term disability insurance.

Veronica has homeowner’s insurance and auto insurance. With my recommendation, she now also has a $5 million umbrella liability policy.

But what about that most valuable asset?

At 33, Veronica has a one-in-six chance of being injured or becoming ill and being unable to work for three months. If she is out of work for three or more months because of a disability, she has a one-in-three chance of still being unable to work after five years. Average length of disability for her age, health and activity is 6.5 years. She also has a 5.1% chance of dying before she turns 65. She doesn’t carry enough disability and life insurance on her most significant asset.

While 85% of consumers agree most people need life insurance, just 62% say they have any insurance, let alone a sufficient amount. Worse, only 36% of American families have personally owned life insurance. This suggests two-thirds of American families have no human life value insurance beyond what may be provided by group coverage. Fewer families have adequate disability insurance.

Consider the numbers:

• There’s a .03% chance your client’s home will burn down in their lifetime. People typically insure 100% of their homes against loss.

• There’s a 7.9% chance a 38-year-old male will die before age 65, and at best will have insured 5% of the U.S. median household income of approximately $50,000.

Presumably Veronica wouldn’t consider insuring just 1% of her home, so why would she only insure 1% of her human life value — especially given the odds?

Perhaps she thinks somehow the family will get along financially. But as we’ve suggested to Veronica:

• Most consumers believe adequate individual life insurance coverage is two to three times their income, well below the industry recommendation of eight to 10 times their income.

• Three in 10 non-elderly Americans said they had no retirement savings or pension. In a Federal Reserve survey, 47% of those polled said they would not have the resources to meet an unexpected expense of $400. They would have to sell something or borrow to meet that need, if they could meet it at all.

If a premature death prompted the unexpected financial shortfall, that creates an immediate need for a lot more than $400.

(More: DOL fiduciary rule pushes indexed annuity carriers to develop new products)

How much is enough? Consider the following recommendations for your clients.

• For disability: Clients should buy as much insurance as they can get — individually underwritten coverage, then group or association insurance. An easy way to see what it might cost is to use a disability income insurance calculator.

• For premature death: Have your clients considered the shortage between their net take-home pay and ongoing monthly family expenses? For example, a 38-year-old taking home (and spending) $5,000 a month, with a same-age surviving spouse who has a life expectancy of another 50 years, is equivalent to $3 million.

(More: Indexed, variable annuity sales slump as DOL fiduciary rule looms)

The problem is $3 million is a big number. What surviving families need is a resource to pay for monthly expenses. Rather than focus on the large lump sum, suggest they focus on the $5,000 a month it’s providing — forever.

Richard M. Weber is president and principal of The Ethical Edge Inc., a consulting firm providing fee-only analytics and services to insurance firms, family offices and high-net-worth individuals.