The fine art of choosing an amount of life insurance: Case Study #4

Johann S. Bach once said, “All one has to do is to hit the right keys at the right time and the instrument plays itself.” It’s mechanical, right? I had a CPA friend make the same observation when I first told him about my idea of a life insurance planning service: just devise a computer program to do it. Many insurance companies have done just that… and the recommendations they spit out compared to mine are as different as night and day. Why?

While there is an underlying element of mathematically measurable data, we are also dealing with people with a variety of human emotions and experience, all of which color their thinking. Blending these two components together is done better with experienced judgment, just as the piano is best played by the experienced.

Yesterday I finished a case with a South Carolina engineer. It started like this:

My present plan is to get a term policy that will bridge the gap until Beth would qualify for Medicare and Social Security. My thoughts are that I would get a 15 year fixed rate term policy for $500,000. I would like to get assistance in evaluating if this is the right type of coverage to get and if this is adequate in duration and amount and where is the best place to purchase it.

It ended like this:

I looked over the Life Insurance Needs assessment you prepared and I have a real peace about buying the $250k life insurance. For me, the $5800/month [income goal] looks good. This gives Beth about 15% more than I had calculated her needs would be.

What he initially wanted costs $1500 per year; what he ended up with costs $700 per year. What transpired in between? It was a combination of financial analysis (clarifying survivorship benefits from his pension, and the way assets were growing and liabilities were being quickly discharged, and the low probability of death within the next 15 years) along with addressing what was emotionally driving him.

Let me make a couple of observations:

• He would not get this advice from an agent. They promote more, not less.
• The consequence of this upfront decision has 10 times the effect of getting a good rate.

On the other hand I got a recent inquiry from another person wanting a quote on term insurance. Apparently he misunderstood the service I provide and when I ask him to complete the questionnaire for the needs assessment, he balked; he “just wanted a quote”. The presumption is he knew how much and what type he needed, so could not benefit from my input in this respect. This is getting the cart before the horse and overlooking the greatest opportunity for price savings, not over-buying to begin with.

Shopping rates is important, but it’s not the starting point. If that’s where this engineer had started he might have felt shrewd while straining at gnats, but would have been unwittingly swallowing a camel. Instead he started with experienced counsel, as Proverbs 20:18 commends. While the second guy saved a consultant fee, the engineer most likely came out way ahead.

Notice that I don’t tell people what to buy. Rather he said, “I have a real peace about buying the $250k life insurance.” I just raise their awareness of facts and considerations that are overlooked in most insurance sales settings. I try to calm their fears, as per Luke 10:41 and 12:25, so they aren’t emotionally off balance as they decide. Then they make their decision. It’s a combination of financial analysis and emotional counseling- it’s an art.