Financial Adjustments: September 2010

Paul Philip, Nancy Philip
August 31, 2010
Written by Paul Philip, Nancy Philip
We have had many inquiries since our last article (June 2010-“Financial Adjustments”) on the topic of life insurance. The two most common questions being asked are: “Who should own life insurance?” and “How much is appropriate?”

Everyone should own life insurance.

First of all, we would like to emphasize that everyone has a value, and anything of value should be insured against loss. Every adult is an asset, whether he or she owns a practice, works for someone else, cares for family members, or cares for their home. The value of an individual, in his or her role in life, is an asset and should be insured.

How much insurance will you normally get?
In the financial media, you may read many articles about life insurance and how to determine the “need” for it. It is unfortunate that many life insurance advisors have been improperly trained; they have been trained to determine the amount of insurance a person should own by using what is called a “needs analysis” calculation.

Why do we say that “needs analysis” type planning is inappropriate? We say it because no beneficiary or survivor, given the choice, would want only an amount of insurance that they supposedly “need” rather than the true value of the insured person who died. Insurance companies will insure individuals up to their economic life value. That amount is the most that they will offer. You can’t get more than that amount, just like you can’t get more home insurance than what your house is worth.

How much is actually appropriate?
If your house were to burn down, you would want to be reimbursed its full value,
not less, through your insurance. Similarly, when a person dies, the beneficiary would not want less money than what the deceased was worth. Why would the beneficiary only want what was needed to make ends meet, and leave the true value of their loved one uninsured?

For instance, we ask our client, “If you knew you were going to die tomorrow, how much life insurance would you buy today? The only answer that would make any sense is, “All I could get.” Premium would not matter since the rate of return would be enormous in one day. If a person loves their family, they should want them to have the best and to receive the true value that their life is worth to that family.”

What reason would there be not to get the most insurance that was available if you knew you were going to die tomorrow? Most people say, “I can’t think of any reason why I wouldn’t want my family to have the maximum amount available.” Then we ask, “What if the maximum amount had no additional out-of-pocket outlay to you?” They typically answer, “That would be a no-brainer. I would definitely want to get the maximum amount of life insurance.”

The most important question
The last and perhaps most important question is then asked: “Could you die tomorrow, and how does not knowing when you are going to die change anything?”

They finally get it. There is no logical reason why anyone would not want to have the full amount of their economic value insured. Why settle for less on your life – your most valued asset – if you would not settle for less on your home, car, jewelry, boat, office building, or any other asset you insure?

Needs analysis is inaccurate because it puts the emphasis of life insurance on the needs of the beneficiary instead of on the value of the insured.

Rule of thumb
A good rule of thumb to use is that if you are under age 40, your economic life value is approximately 20 times your gross income. If you are between age 40 and 55 your replacement value is about 15 times your gross income. If you are over age 55 and still working, your replacement value is about 10 times your gross income. If you are retired your replacement value is the value of your net worth.

In our last article, we detailed wealth strategies whereby the life insurance policy is used as a living benefit, for the benefit of both the insured while alive, and ultimately, their beneficiary. Our experience has shown us that once a person truly understands the value and creative uses of life insurance, it becomes a “want” decision with the client often asking, “How much can I qualify for?”

Working with the right advisor, it is possible to acquire full-value insurance for your life at little or no additional out-of-pocket outlay over and above what you are currently spending. •

Paul Philip, CFP, CLU and Nancy Philip, CFP, CLU  are a dynamic sibling team who have been advising hundreds of chiropractors across Canada since 1992.  Their firm, Financial Wealth Builders, is located in Toronto, Ontario.  To learn more about building your wealth, visit their website at or contact Paul or Nancy at 416-497-0008.

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