Latest / Wealth On Main Street / 338: How Much Life Insurance Do I Actually Need?

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338: How Much Life Insurance Do I Actually Need? · Wealth On Main Street

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Foreign.
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Welcome to wealth on Main street, where conversations about growing your wealth are fun and entertaining. Wealth isn't just about money. It's the skills and the knowledge that we develop to pass on to future generations. Tune in each week to grow your mindset and your net worth at the same time.
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Just how much life insurance do I actually need? What should I have? These are common questions. How much should I have to protect my family? What about my business? What happens if I were to kick the bucket early? How on earth do you even figure out how much you should have in the first place? This is one of the most common questions people are typing in on Google. Uh, they're asking ChatGPT and they're typing it into YouTube. They're searching for answers because they feel the weight of responsibility. Shouldn't I just have 10 times my income? Not exactly. I mean, it really depends on a lot of factors. A lot of these online calculators, they aren't very effective because they don't factor in critical elements. They're usually very oversimplified. They can give people, in my opinion, a very inaccurate number based on their actual circumstances. Your family doesn't love you because of your income. They love you because you. If the income earner, the primary income earner, dies, the flow of financial energy stops immediately. The bills don't stop. The mortgage company doesn't say, hey, take three years off of payment. Life insurance is actually the original GoFundMe. You just pay for it every month or year and you're in a big pool of people. I only need enough to pay for my funeral and my final expenses personally. Just all things being equal, I just think that's irresponsible. Someone's going to have to look after that whole process for you. Please make sure you have more than that. Your family deserves better, in my opinion. Today we're going to clear up a little bit of this. We're going to look at a couple examples I'm going to show you and different demonstrate a tool that we've built for this purpose. The truth is, the real answer to all these questions comes down to a powerful concept. It's something called human life value. Yes, I'm using aggressive air quotes. It sounds weird, I know, but life insurance companies, quite literally, they assess and estimate your human life, what it's worth on paper based on key things like your age and your income. And there's some other factors as well. So today we're going to cover a little bit about that. How much coverage you should have. Some key things you should be aware of. And we're going to bust a few misconceptions like shouldn't I just have 10 times my income?
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Not exactly. I mean, it really depends on a lot of factors. So we're going to cover that and our tool will demonstrate that as well.
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Depending on what stage of life you're in is really going to be the key differentiator. How much more income is further ahead. What are your responsibilities? Do you have a mortgage? Do you have debt? Do you have a kids college fund? Do you have kids? You know, are there dependent people that you need to be worried about? Do you have debts to pay off obligations? Is there any key responsibilities that you need to mathematically prepare for? How is that done? And then I hear things like, but Richard, I use an online calculator and it said that I should have this much and insert kind of blank here.
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Look, I'll be blunt. A lot of these online calculators, they aren't very effective because they don't factor in critical elements. They're usually very oversimplified. And in many cases they can give people, in my opinion, a very inaccurate number. They based on their actual circumstances.
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Don't worry, I've got a solution for that. We've developed one I think will help you get much more clear, certainly not perfect. And we're going to do a demo of it today. I'll. I'll have the screen share up. So stick around, see how easy it is where you can really determine this. If you want to go ahead and just try it out right now, simply head on over to life valueplanner.com that's lifevalueplanner.com so this episode is all about human life value. After all, you're a human. I sure hope so. Otherwise you're probably not watching this channel. And I'm assuming that you've got a life.
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And guess what? My opinion, and I hope that you share it, is that your life is pretty damn valuable. And I think that there's probably people you love and care about who would certainly agree.
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Now, our goal here at wealth on Main street is to help you understand what this means mathematically, practically, and how an insurance company underwriter might view that your, your value. And when you're working hand in hand with an insurance agent to put something together, whether that's for The Infinite Banking Concept, which is something we focus on here, or just general family protection, these are things you really should know and should understand.
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I'm really tired of seeing the misconceptions that are out there and the lack of education that people have around this topic. Protecting our family really matters. So people tend to miss some of the biggest things. And one of the biggest ones I'm going to cover today, we're going to show you is really the importance of solving for replacement income or the income gap. This is an area that people generally don't recognize and understand and it's often poorly planned for because of that, many families end up being vastly underinsured. That's what I see most often when people come to me and they've got insurance. I always love it when they have insurance. It's actually pretty rare that I meet someone that steps into an appointment with me. I've got their financial information and I see they actually have enough coverage. So we want you to be informed. And we're going to dig into a couple of things. So let's unpack a little bit about what we're going to cover in today's episode. Episode first, what human life value really is and why it matters. Okay. I already give you some seeds on that. We're going to expand a little bit more. How exactly do the life insurance companies in general look at these things called income multiples based on your age to help determine that human life value? It's a rudimentary calculation, of course. It can be adjusted a little bit here and there and how your human life value changes through different life stages. This part is really important that people don't usually understand. What are some of the common misconceptions like having 10 times your income is enough insurance or just having enough to protect my debts or mortgage or creditor protection?
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We're going to take a look at what most online calculators miss. I've already planted a bit of a seed there. And the biggest mistake I really think is is not understanding the replacement income gap, which we're going to heavily focus on a little bit today. And then we're going to tie in a little bit on just how this can be connected to the family banking system. So let's go ahead and walk through it. What human life value really is. It sounds like a technical term. It also sounds like a really obnoxiously boring and kind of weird term.
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But it's pretty straightforward. It's the economic value associated with your life based on the people that depend on you. Now, the insurance company or in general doesn't know your family story and your history. What they do know is your income and they know your age. And that's really what determines this human life Value. It's really a number that doesn't identify what you're truly worth, but it's what they can stick on a spreadsheet really quickly. All right? Your family doesn't love you because of your income. They love you because you and your kids don't care about your accuracy, actuarial value. At least mine don't, not that I know of. Your spouse isn't sitting there saying things like, well, based on your future earning potential, I really appreciate you. Okay, that's not exactly how life works, but when we're talking about insurance, we do have to deal with the financial reality of what disappears if you're no longer here. So your income is financial energy. We talk about that a lot in our channel, especially when we're referencing The Infinite Banking Concept. So if you think about it that way, every month that goes by, financial energy flows into your household and it's flowing out. It's going to pay for mortgage, rent, buying groceries, the kids, hockey, dance classes, piano lessons, probably some braces along the way. Fuel. Fuel prices are up right now.
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Vacations, camping gear, literally all the things that happen in your life. So some of that energy gets consumed immediately, some of it gets stored.
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Now our listeners are storing it inside of the family banking system for the most part. That's what we've been teaching people about. And most of our listeners are incorporating that in their way that their life, to some degree, some of it gets directed to future goals. Okay, you know, call it retirement or savings or major purchases, and much of it leaks away through inefficiencies. That's just the way it kind of works in most people's lives.
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But if the income earner, the primary income earner dies, the flow of financial energy stops immediately. The bills don't stop. The mortgage company doesn't say, hey, take three years off of payments, everything's fine.
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Groceries still need to land in your refrigerator. You know, the kids still need new clothes. They got to pay for activities, they need education.
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And more importantly, beyond all of that, they need stability. Stability really matters. So human life value is asking a very important question. Is that financial energy? If that financial energy just completely stopped, it was full on dead, quite literally. What amount of capital would be required to replace it? And for how long do we need to replace it for? That's the heart of this conversation. So life insurance is not just about creating a pile of money. It's about creating a strategic replacement value of financial energy that your family depends on. And that is what insurance companies are trying to determine if the application they just received and they're looking at it like, does this make sense? How much are we asking for here? Does the coverage seem reasonable based on human life value of the life insured, or are they overinsured based on our numbers and how are we defending that? Like, does this case that we received from the insurance agent make sense? When an insurance company looks at an application, they're not just, you know, they're not just saying, oh, how much would we of this person should they buy? Like, what are they allowed to get? They're really asking, does this death benefit that's being requested have merit? Is there an economic reason, real justified reason for this amount of insurance to be in place?
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Is it reasonable based on the person's income, their age, assets, liabilities, family structure, planning objectives? Now, many of those things they won't know unless a cover letter or a description from the advisor comes in. But if they just have a basic application, they're putting two and two together pretty effectively. All right? Now, when it's properly designed, it protects the people you care about, that is the insurance amount, while it's also fitting into a broader financial system in your life. That's what we try to focus on and teach here.
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But the human life value is such an important concept because it gives us a framework, it helps us avoid some of the guessing that goes on, and it helps us move past random rules of thumb so that we can become a better steward for the financial responsibility that you already carry. Now, here's something that people don't really realize is that your human life value changes, right? Your income changes, your age changes, your, your responsibilities changes, different stages of life. And I'm going to show you what that looks like visually in a minute.
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So before I get into our demo, we're going to go over a few examples. I want to unpack this and the insurance company's viewpoint.
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So the typical way that a life insurance company. Again, I'm making broad strokes here. All right. Assess human life value is using what we call income multiples. Not sure if Becoming Your Own Banker fits your goals. Trying to figure out if this is even for you. Well, save some time. Look, our free 7 Simple Steps report is the fastest way to find out. It's designed to give you total clarity and focus your effort on what really matters. Plus, you'll get access to four of our best selling books as a bonus. Go ahead, get it at seven Steps ca. That's seven Steps ca.
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Now, after reviewing the financial underwriting guides from several insurance carriers in the United States and Canada, they do vary a little bit, sometimes the age start point or the multiple changes, but they're in a pretty common range. Every company has its own slight rules and underwriting culture, all right, but it's way in its way of interpreting an insurance application when it shows up for the underwriter to look at. But age brackets and income multiples are pretty similar, all right. The variance is almost inconsequential, I think. So I'm going to give you a ballpark range using one of the life companies as a target, using the age and income multiples that they have, and we'll base our guidelines on that. All right. Think of it as a guidepost, essentially. So here's the general example and I'll show you a visual in a little bit. The approximate income multiple. So if we look at age 18 to age 29, so before you hit 30, the multiple is typically 25 times to 30 times your income. All right. When you reach age 30, 30 to 39, it's usually 20 to 25 times income. And when you reach 40 to 49, usually you're in a higher income earning bracket, but the multiple comes down. So it goes from 15 times to 20 times income. Once you reach 50, and we're looking at 50 to 60 range, you see it drop again. Now we're looking at the 10 to 15 times range because you're aging up and so your amount of Runway of life goes down. Now you hit 60, we're looking at 60 to 70 range and often we're about 5 to 10 times income. But your income might be lower and so your amount of insurability might be lower as well. Now again, these are guideposts, they're not promises, but it helps us think. So as you move through these stages of life, the amount of insurance you can get actually goes down unless your income is much higher or other factors. All right, so let's use someone who's 32 years old and they're earning $100,000 a year, using the 20 to 25 multiplier as a guideline, this person would have a human life value capacity in the range of 2 million to 2 and a half million dollars. All right? Now some people might hear that and they were like, oh my God. Wow, that sounds like a huge number.
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It's really not. And if you think about it for a second, if that person has a young family, they've got a mortgage, two kids, they're 5 and 8 years old, 30 years roughly of working life ahead of them is $500,000 going to replace their income?
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Probably not. It's not going to solve the debt problem. Plus income, plus final expenses, you know, give the chance for the family to go on living. 500,000 does sound like a lot of money. Until you ask it to replace decades of your income, it really just doesn't stack up.
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So let's take another example. We'll use a 45 year old and they're earning $150,000 a year. So using the calculator of 15 to 20 times income, now we're in a range of 2.2 million to 3 million. So the income went up, but the multiplier went down. So the leveling effect of what you can qualify for sometimes kind of lands in that range Again, do they have young kids? Do they have older kids? Are the kids dependent on them? Do they have a special needs child perhaps that is going to require long term care? Do they have debt? Do they own a business?
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Is their spouse dependent on their income for some reason?
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Are they protecting college education funding? Right, what about estate planning leads? Like now you're getting into the checkboxes of all the things we need to think about.
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We have the, the general calculation of the human life value and then we got to customize based on what's really going on with that individual's life. So now let's Compare someone who's 63 years old, all right, Their human life value multiple starts to get lower because fundamentally the remaining working years are much lower. It doesn't mean insurance doesn't have a purpose. In fact, it might have a higher purpose for them for some reason. But at that stage the conversation often shifts more towards estate liquidity, making sure there's enough for final expenses, tax obligations, business succession, maybe some charitable giving, very legacy oriented conversations. But you know, maybe they have a large rental portfolio or still some substantial debts in place. So we need something to cover that. So that number can be defended by an agent by saying, hey, look, maybe the human life value is this, but we need to apply for this amount. And if we have a reasonable business case, we can still get that accomplished. But the insurance company is going to look at the initial filter and be like, I don't know, seems a little finicky. Why do we need this much coverage? And then you have to step in and defend the rationale for what you're requesting. All right, so human life value, it changes through life stages is basically what I'm getting at. It's highest when your future earning potential is the highest. So that's when you're younger. Now, someone in their 20s and early 30s, they might not have the same level of income. So the multiplier might be higher, but you may not be multiplying by much income. Like if you're in university and you're not making anything except a part time job in the summer, well, if you multiply that by 30 times, like it doesn't necessarily add up to a lot. But then as soon as you start working and earning, earning good revenue, it starts to grow. So that's kind of the way to think of it. Now they start a family, they might just start to feel like things are getting to going and they want to be able to access and increase more. But again, that, that relevance to income is always going to be a factor in what the insurance company is looking at. All right, so moving to someone in their 40s, what does that look like? Well, at this stage, you know, again, income is usually higher. People are getting into a, they're well trained, they've got skills, they've got management or a business. Like they're, they've developed themselves to a point where usually they're demanding a better dollar. Okay, but they still might have mortgage, they may still have kids at home.
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They might have a lifestyle that's very dependent on having, you know, one or two incomes, but someone's usually the higher income earner. What's that gap? Okay, if the obligations are larger and the people depending on you may not have, again, there's a, there's a Runway of how long they're going to need your income as dependents. All right, Moving into the 50s category, kids are often older. Maybe they're out of the house or they're, they're finishing university or university's been paid for, the mortgage is smaller or gone. Income still may be really, really strong, but retirement planning is really serious. And now they're looking at, okay, well how do I fill that gap? Because I was spending all my money on my kids before, like how does that work? So those become new conversations that you need to have.
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Again, they might not need the same income replacement as the 35 year old who has toddlers, but there may still be a spouse who's dependent on their income and again, still debts, especially if they're maybe aggressively using debt for investment purposes or something.
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Those are all things that we need to factor in.
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All right, moving into the 60s, again, conversation changes. You're kind of in that approaching or pre retirement stage for a lot of folks in, you know, the typical model of the world. But again, We've got liquidity, taxes, estate bills, final expenses. Inflation is always kicking our butts. So how does that factor into the calculation? So just looking at a random rule of take my income times it by this number equals x isn't necessarily sufficient enough to say, this is what I need. It's just a starting block. And that's really what the human life value calculation does. But it's one of the initial filters or starting blocks that an insurance company looks at. Okay, so let's take a look at a tool and we'll see. You know, I'll walk you through an example. I'll use, you know, some, some numbers, and we'll kind of go back and forth and look at it so that it's very interactive. Again, you can find this tool over at Life value planner. That's lifevalueplanner.com and we'll take a look at it there. Before we do that, I just want to cover some of those misconceptions that we talked about briefly. I just want to highlight them before we look at the tool. So thinking about getting into our demonstration, I think you'll kind of see where some of these misconceptions come to effect, because our tools show you a little bit of that. But one of the common things that you'll hear out there is just get 10 times your income. Well, based on the multipliers I gave you, that just doesn't make sense. If you're 25, 35, or 45, 10 times your income isn't sufficient based on the human life value calculation. Hey, if you're at 60, that kind of makes sense. But in every other situation, you're almost always going to be underinsured, then you got to also factor in the debts, and then we got to factor in again, the kids. What else do you need to make sure is available? Final expenses, all that stuff. So just saying 10x is going to do it isn't really going to be sufficient.
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All right.
19:11
Also, if all you did was just look to get enough as a. Again, the conception or the misconception that we hear is I only need enough insurance to pay off my mortgage or to pay off my car. Well, people refinance mortgages, people buy new cars, they get into debt again, they consolidate debt, they get into hot water. And so if five years ago you got a term policy that covered your mortgage and that was it, and then you refinance the mortgage and now it's almost double the size and you consolidated a bunch of debt, but you don't adjust the insurance, like that's irresponsible fundamentally and we see that kind of stuff quite regularly. So people will go and modify or update their debt and other areas of their financial life, but they won't go and bring their insurance equation into the mix properly. All right. The third misconception is I just need enough to pay for my kids college fund.
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Sure, that's great. Education matters and like honestly if you have anything greater than zero, you're better off than some people. There's a lot of folks who have literally no insurance and we see GoFundMe campaigns and it's unfortunate because life insurance is actually the original GoFundMe. You just pay for it every month or year and you're in a big pool of people and it's like a communal GoFundMe. It's kind of how it works. So you know, I don't think just planning for education is sufficient. Okay. The fourth one is I only need enough to pay for my funeral, my final expenses. Now personally, just all things being equal, I just think that's irresponsible and I think it's not, not being a very good steward of your financial life. People have, someone's gonna have to look after that whole process for you. And that person is going to take a lot of time and a lot of energy. Basically take on a second full time job as an executor to solve all the problems that you leave behind. And the more problems you leave behind, the harder it is. So please make sure you have more than that. Your family deserves better in my opinion. So we're going to go ahead and open our tool up, we're going to take a look and let's walk through these examples together.
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Walks you through a little bit about how it works. Again, I'm just going to jump right in and there's some frequently asked questions there if you want to dig in. So I already have one started. I'm going to, I'm going to click ahead and open up to step one of five. So there's five steps. Step five is technically your results, but because we want to get you a result right away, there's an option to add more information in step five, which is going to be around things like your assets, which will create an offset to your insurance recommendation. Okay. So keeping that in mind now, first things first.
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I've got my name in here just to get things going. So we got the basics name where you live, US or Canada.
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The reason we have US or Canada here is because depending on the location, province or state, there's some differences around estimated costs for estate values, like what you should plan for, for funeral arrangements and estate taxes, things of that nature. So for the purpose of our example, I'm going to use the United States first. I just picked an age of 43. I picked a gross income here. So you can see how easy is. You can adjust your, the slider and pick kind of where you're at. Everything is rounded to, you know, nearest kind of 5,000 or $10,000 increments just to keep it nice and simple and clean. I mean, the exact number you have doesn't ultimately make that big of a difference when you're in this process. We just want to get an idea so we can have a real clear concept of what we should have. So the next step is about your family, who's in the household now, in this case, spouse, partner, I checked. Yes. You know, you can put the spouse's name in there, of course, and stay at home. Parent matters because the income gap is quite substantial. So if you chose no, you would select your spouse's income and it would help determine what's the difference between your income and the spouse's income, like who's higher and how does that affect the insurance need fundamentally. Okay. So for right now, I'm going to leave it at stay at home. Spouse, do you have dependent children? So obviously kids under the age of the age of majority, 18, if they're dependent because they're living at home and going to university, or if you have as an example someone with special needs and maybe they're going to be dependent a long time, that also would fit into the gap. And so number of children and the youngest age. So I'm going to use three kids in youngest Age seven.
23:57
And then we're going to talk about existing coverage. So not all life insurance behaves the same way. Some is personal owned and some is stable. Some are new at higher rates, like term insurance. We'll talk about a little bit. Some may disappear when you change jobs. This is really important so you can choose what you have. Now often we'll have people fill in a financial intake form for us and they'll indicate that they have insurance. And through a couple of questions we'll find out it's really just group insurance with their employer. Unfortunately, group insurance, while it's a nice to have, if you no longer work for that company, you get fired, you leave it, you take a new opportunity, you lose that coverage. Sometimes when you leave, you'll have an option to continue paying for it and have some payment variation there. The key thing is you don't own that policy. You don't have a policy contract with your name on it as the owner. So you don't actually own it. It sticks with the group plan. So for the purpose of calculating a needs assessment, I fundamentally don't think that you would add that value in because for many people, they lose it, they give it up, they don't have it when they ret.
24:57
Again, job changes happen so dynamically and drastically. It's really not something you want to bank on. It's a nice to have, but having your own policy that you're the owner of, where you have control, you can make changes, you understand, it is far more important. All right, so I'm going to check a few of these here. I'm going to go personally owned. I'll check group coverage just so it's on here, corporate owned for a second.
25:18
And then mortgage and creditor insurance is very common.
25:22
One key thing to know about that, you know, if I, if I check this, is that typically some mortgage insurance platforms or creditor platforms, they go down as the, as the loan balance declines. And the problem is you age and the loan balance declines. And then if you reset the loan or buy a new house or get a new loan, well, you have to reapply at an older age, your health may have changed. Like a whole number of problems happen. Something I refer to as cost creep builds up there because the costs could creep up and escalate actually over your lifespan drastically through life's natural changes. If we really understand what happens for most people, you know, I've made the statements like, oh man, I love this house, I'm never leaving it. And then five years later I left that House. So, you know, even, even myself have been caught in the trap of thinking I was going to stay in a place. And then life threw me a curveball and I decided to move.
26:11
So having proper coverage that I own has been very beneficial for me because I've locked it in at various ages of my life and have locked it in consistently, which makes me very happy. That's one of the powerful things about whole life insurance, which we're not going to spend a lot of time on today. Okay, so I'll check that the personally owned coverage is term insurance and you can check multiple types here. So indicate what you have. So I chose a universal life policy where the starting whole Universal life is 100,000 and the policy issue year, if you know the year as best as you can. If you don't know, just put unknown but select the year that you have it. That would be very beneficial because it's going to start to say, well, if you have term riders or term insurance, like when's the renewal time frame coming up? All right, do you have any riders attached to the policy? If I check no, it doesn't say anything, but yes, and we indicate what we have. I'm going to put a term rider on here and then what's the term length? What was it, a 10 year, 20 year, 30 year? Like what did you get as a rider on that policy? If you don't know, take a guess.
27:10
But for right now, I'm going to pick term 20. I'll put 600,000. So this one policy was 100,000 of you, a Versal Life plus $600,000 a term. Now I've got another term policy for $500,000. Let's pick a year. I'll go for an earlier year. I'll use 2010 and then corporate owned. I'll also put a term insurance there. I'll say it's a million dollars. I purchased it in 2015. Okay. So this is very common, by the way. We see people who get insurance at different points in time, different types of insurance, different companies. The end result is they have a confusing hodgepodge of insurance and they don't even know what they have.
27:44
So part of going through an assessment like this is to be able to say, what do I have? Let's refresh our mind a little bit about what we've got and get clear on it. So that's very helpful as well. All right, group work coverage. So we've got a note here. You do not own this coverage. It's provided by a group Plan association, maybe a professional association, etc, and there might be some, some good premiums, like discounted premiums on there because they do like a bulk pricing kind of model. But as soon as you go to leave you, you have to either accept to take it or get rid of it and you've got nothing. It's, it's very unfortunate that that happens. All right. But I'm going to put the number in there anyhow.
28:21
So let's click continue to go to the next stage. So the next stage is understanding what are some things that we should plan for. So finally, expenses and family transition fund. Now this is really important so you can choose which state you're in because remember I selected United States at the beginning. Now I'm going to choose California for this and it's giving me a suggested final expense and transition fund. So transition fund is really looking at what do we need to have to help the family get through things. So you can click on the info button here. So it's not just a funeral, it's immediate liquidity, cremation, memorial gatherings. You know, maybe you need to get some government certificates. You got to pay for little fees here, accountants to sort out the final accounting bill. There might be court costs, executor support. I mean it's just everything that goes on. So we want to have a little bit of extra there. The 90 day transition fund just gives you a little bit of boost of extra capital to help get through some of those things. Okay, so this kind of breaks down. What are we really factoring in here?
29:20
Now if we go, you can adjust the amount. Okay. So you can tweak and modify it as much as you like. Okay. So there's a few different options here. I'm just going to stick with use suggested.
29:30
So it's saying, hey, let's plan this for burial, memorial stuff, documents. We need to get Transition Fund at 10 Grand Probate Reserve based on our, our net worth. So if there are any estate tax issues, well you can compare from different states these, some of these estimates on different burial cremation costs, probate admin costs based on the size of an estate. Right. So it gives you a rough estimate and that's where it's giving us a suggested number to make sure we're covering everything there regardless of the state. Now if you had selected Canada, it would have given you something similar. It was just less provinces. Okay. Same concept applies. All right. Factoring in probate, etc. Now the next one is family income place. This is when I was harping on earlier. This to me is kind of the big kahuna. One of the main reasons I wanted to record this podcast is actually to isolate this because when we meet with families, by far and above, this is the most misunderstood and poorly planned for element of anyone's existing insurance scenario. All right? So I think it's really key to understand what is income replacement and why does that matter? Okay, farmers, business owners, look, stop letting banks control your growth.
30:41
Our book growing your own capital shows you how to finance equipment, land, inventory and the expansion of your own family system. Get a free digital copy@growyourowncapital.com that's growyourowncapital.com so again, it's when a household has one person who earns more, usually substantially more than like, like not just $10,000 more, but earns like 50, 60, $100,000 more, especially when there's a stay at home parent. Now in this scenario, I chose stay at home parent, as you recall. So even if debts are paid off and final expenses are covered, the family needs ongoing income. So just imagine we've got all these debts we've put in, we've got a million dollars in debt and you know, of all the stuff added up and then the final expenses are 50 grand. Okay, so we got a million 50. If I just had that much coverage now, okay, my, my wife can pay off the mortgage and pay off some loans, but. But now what? There's no, nothing coming into the house. So how does she pay the property taxes? How does she pay the car insurance? How does she put groceries on the table like, and plus do that through an emotional experience like, it's just extremely difficult. This is where we start to see the GoFundMe campaigns kicking in for people really unfortunate. And if we just planned effectively for this and everyone did that as part of their natural responsibility as a parent, as a spouse, you know, we really wouldn't have a lot of those problems. Okay, so when we, when we lose the, the rule of thumb again, I said I was going to try and get away with ones, but I'll use this one anyway. When we have a dual income household, right, two incomes or, or just one main household income in this case, because we have a stay at home parent, they say that when we lose one of those incomes, we need 70 to 75% of the household original value, the income coming in, in order for the family to maintain going on during that transition. All right, so we want to plan for that gap and it's saying, well, how long do we Want to plan for it? Well, we want to plan until at least the youngest child reaches age 24 or maybe age 18 or 20 somewhere in that range. So this is suggesting 22 years because we indicated the age of the youngest dependent child.
32:46
For the sake of our example, I'll ratchet it down, I'll say, you know What, I think 18 years is good. That's going to make me feel, feel good with what we've got. Okay, what are our debts that we want to pay off? Okay, check all that apply and then you simply enter how much? So I've used a bunch of numbers here. We've got some tax obligations. I've added in education funding for children. So typical four year university in Canada runs 15 to $25,000 a year per child. Now that's kind of today's number. Obviously that can range. I selected the United States. Those numbers can be drastically higher. If you're going to an Ivy League college, you could be spending a hundred thousand dollars a year. If you're going in for a doctorate, I mean, who knows? So that, that those numbers can certainly be ramped up. And you can see that our slider goes all the way up to $125,000 a year. So you can play with that. So for the sake of our example, I'm just going to leave it at 35,000.
33:34
And we're planning for four years in this case for three kids. And it's going to automatically inflation adjust this a little bit based on when the youngest is going to university age. And it's suggesting that our projected cost at that time is about 43 grand a year, which means we need to plan $522,000 in our needs assessment to cover 35 grand a year of today's money for three kids for the college education fund. So again, this is another area that's often very much misinterpreted when we're thinking about how should we plan for this result. So let's go to see my results and see what we got. Well, boom, here we are right off the top. Richard, here's what you need. Your action and coverage you need today is 2,913,000.
34:20
Now this says this is net of basically any life insurance that's already in place. So this is what we, you would be requesting or wanting to apply for new coverage based on the variables that we put in. Now there's a corporate policy there, so I could add the corporate policy and offset this. It depends. What is the purpose of that corporate policy? Is it for A buy sell arrangement. You know, what was the scenario that it was in place for? Whether you would want to add that or not as part of your total coverage line. So you wouldn't just add it immediately because it may be earmarked for a lender loan or for some other reason. So there's an option to turn it on and off here. Okay, in this scenario I'm going to leave it off. So it adds up our existing coverage and it's indicating that we hold term coverage because we did indicate that. Review your renewal date and conversion options with an advisor. Very important. And it kind of. There's a little info button here.
35:11
It's suggesting that the human life value remaining is $2.5 million. So what I need and what the human life value remaining that I have available to work with is a little bit out of alignment. So if we submitted for $3 million of coverage, the insurance company might ask more questions. Wait, your human life value only says 2.5 million like you're asking for more. What's this scenario? So we would have to defend that scenario. Well, we got more debt. We have, you know, stay at home spouse, we have dependent kids. Like we would explain that rationale. Okay, now here's where we're going to refine this. So we technically have a result but we haven't refined the result. So in step five, we're now going to add some assets. So let's go ahead and do that.
35:53
I'll put cash savings, we'll have a brokerage account.
35:57
I'll put 401k and I'll talk about that in a second.
36:01
Let's use, we have some other assets and we've got some investment property equity. So it's going to give us some heads up here. Now cash and savings. I'll pick a number. Okay, we got 70 grand, we got a brokerage account with 195. I got a 401k. I got a bunch of money in that 401k. However, the problem with that is whether it's, you know, 401k or a registered account in Canada, like an RSP, is that at death, then you would have to pay estate tax on this. Unless you can do what we refer to as a rollover or a way to pass that over tax free to the benef, to the beneficiary. Usually that's a one time pass to a spouse. And so a rollover might apply. In which case, in general, these types of fund, registered accounts, in general, they're not very liquid like you might be able to liquidate them, but they have certain rules and then you're paying a huge tax bill. So the number that you have in there isn't what the family is going to get. If you had to liquidate and ultimately if it was for a retirement purpose, to be able to pass it on to the spouse who maybe doesn't have the same retirement accounts you do, you're actually, you're actually offsetting the amount of years you need to maintain an income. So to add it into the needs assessment, in my opinion, it doesn't make sense to identify what you really need coming in right now.
37:13
So again, this is a big taxable event for a lot of people. If we don't, I don't have a way to press off either way.
37:20
It's something to be aware of. And I'll put in some investment real estate here. Now it says it's not factored in. And the reason it's not factored in, although you, you could do that, is because often investment properties, you know, any of our real estate investors watching will recognize that the price and value of a piece of real estate tends to change without your control. And a decision by a president or a prime minister or a, you know, global strife could impact, you know, the oil price, could impact the price of your, the value of your house, interest rates, etc. So there's a lot of factors there. And so liquidity isn't necessarily easy if we're talking about what we need for liquidity. All right, so it's factoring in 292,000 of those assets. And then here's our breakdown. So here's the income replacement. See, this is where we talked about it, but we didn't show what it is. Now you can actually see based on our situation, because this is a single income household with a large income that we're going to lose, we need to replace 70% of that income for a number of years. We said 18 years. So this is the replacement value that we need to make sure shows up to provide that value for the family, paying off the debts, the college funding, the expense, final, final expenses. And then we've got, here's what we need. But we have some insurance and we have some assets. So if we, we, we put it all together, what we actually need to add for coverage to properly protect this particular family is $2.6 million. So this is how we should be thinking about going through a needs assessment. And when we meet with families, these are the types of things that we factor in when we do that. Good work. We actually have a responsibility, at least in Canada, to complete a needs assessment. And it's part of something that goes on our file. And we need to make sure that our client signs off, that they understand that we've made a recommendation of an insurance need and they're choosing a number either greater, the same or lower than that, whatever they've choose. And if they choose a lower, if I Recommend they need 2.6 million and the client says, hey, Richard, I only want a million, that's your prerogative. But I need you to know that, that I've made a recommendation. And if something happens to you and your spouse calls me, I'm going to like, actually, no, I told Richard he needed 2.6. He told me he only wanted a million. I tried to suggest more. He was adamant, you know, that's why you don't have enough coverage. So that's why we have that in our file. But also it's just a good, it's just good to understand. It's good to know these things.
39:48
Knowledge, Knowledge on its own is just knowledge. But doing something with knowledge, you know, people say knowledge is power. I disagree. I think the application of knowledge is what can become powerful. It can also become damaging depending on how you're applying it. All right, so then we talk again. We're talking about human life value here. So let's circle back to that. There's a couple of notes about the spouse in here. I'm not going to discuss that for right now.
40:13
Human life value capacity. So it's saying based on the income, the simplified human life value is $3.7 million. In this scenario, based on the age and the income of the individual, however, they already have personal coverage. So we've already used a chunk of that human life value. So the remaining capacity, what we have ability to work with, is two and a half million. So understanding what you have for insurance and what you can still get, because the insurance company looks at what's called all lines, all lines of insurance. We can usually bypass group plans, but all lines of insurance is what's adding up to that human life value calculation, which sometimes is why replacing insurance, while generally we don't seek to do that, there's circumstances where sometimes it's necessary to get the coverage you want, the coverage you need, the style, the type, maybe it's implementing a whole life structure, whatever that is, but to do it in such a way where we're able to stay within the human life value guidelines, and you have an existing term policy and it's renewing in three years.
41:12
Replacing it might make more sense now anyway because we, our objectives have changed, the world has changed. And so we're shifting old coverage into something new.
41:20
So there's many reasons why that happens. Okay, entrepreneurs, this content is built for you. Comment below, tell us what money topic you want to hear more about. Your insights and questions inspire us to create the content that coaches you to build lasting control and growth on your terms. Now I mentioned earlier I was going to give you a visual of this. So here's that human life visual I was talking about and the capacity. So our individual here we put at 43 and you can see as we go through these different ages and stages of life, the capacity based on income goes down over time. Now the reality is it's showing like $6 million here for this 25 year old. That's not true because at 25 this same person wasn't making the same amount of money. All right, so from that vantage point, this visual isn't fully accurate, but it is telling the story of how your life value coverage elements go down based on those multipliers. And that's really the key of what we want people to understand.
42:21
And so notice that we're, we're 43. And so in this, you know, using the numbers from one particular company, in two years we're going to go down with our multiplier and the amount of coverage we'll be able to get is actually going to go down. So if we don't solve this now, while they have the capacity, they're actually going to lose that capacity.
42:42
So understanding throughout your ages how you lose capacity to grow, let's say your family banking system matters. So you're going to want to make sure you're adding and tacking on elements or having term insurance or term riders in place so that when you're ready to grow. Because let's just say for an example, if I cross age 45 and my human life value declines, but I've already got a whole bunch of term insurance and term riders in place with good quality companies, mutual companies, I can convert into high quality whole life insurance, dividend paying whole life and then I can utilize that to expand my family's banking system.
43:19
Well, the insurance company might not grant me any more coverage because I've already got too much. So I have all the potential that I require already established before I roll into that new calculation of human life value. That's one of the key elements I wanted our listeners, especially those focused on The Infinite Banking Concept to take away from today all this planning and pre planning and thinking long term strategically matters. Nelson Nash did say you need to learn how to think long range. That's rule number one.
43:47
So scrolling down, we have a little quality coverage check here. We've got a lot of term insurance identified, only a little bit of permanent. The permanent in this case was a universal life contract. We didn't get into the details of that. But the term insurance. So we have term insurance renewing before the 18 year income replacement time frame.
44:05
The youngest child is seven. If we're going to protect the 25 and we might need more coverage, the term renewing in 10 years could create a problem in that because the spike in premium is going to be drastic. All right, now here's some additional term renewal risk renewal scenarios with term insurance. Again, term insurance is a powerful tool we use. I own term insurance, I have term riders. I just explained some of the reasons why I'm a big fan of it. When we're using it strategically, just having it on its own as the thing that's the back end of your financial household. That's only good. If you're working with a limited budget and you just need something right now, that's fine. But if you're banking on that for the rest of your life, that is not a reasonable financial strategy. So understand that those term insurance renewal rates is going to drastically increase the premium because the insurance company actuarially needs to get more money for that term insurance and pay to pay the death benefit benefits. So you know, you could be looking at anywhere from 250 to 1200%, sometimes even more than that percentage increase on the premiums at certain renewal dates. So this is why you need to start establishing layers. Think of it in layers of like a, what do they call it, a seven layer dip. Right. Those are yummy. Think of building a seven layer dip around your financial life and protection and mixing in and adding in elements of proper permanent protection. My preference of course would be dividend paying part whole life because now you get an asset and you can use it and you can do some wonderful things as long as you understand how to use it.
45:33
But you're, you're layering in permanent protection over phases so that term insurance can phase out and the whole life can phase up. Okay, but again it's explaining when you're going to run into some of these risk cases.
45:47
There's a little bit of a summary of like term versus permanent here, nothing too crazy.
45:52
Also suggesting because we selected United States A life insurance beneficiary check may be, may be important because of certain rules around estate taxes and that sort of thing. So having properly designed beneficiaries does matter. And you may need to refer to a planning attorney again, talk to your insurance agent first and discuss that optional refinement. So there's some other elements here around estate and ownership task just to, just to get you thinking about it, the purpose isn't to provide you tax advice, it's just to get you thinking about things you should consider. Because if you're planning for insurance adjustments anyway, you might as well plan for this. And then we also have some critical illness recommendations in here. So you can say, well, how much should I have for critical illness? You know, I would say at minimum people should really plan to have one full year worth of their income available in critical illness.
46:41
Certainly when you're at a stage where you have dependent children and you have mortgage payments and things of that nature. So if you think about it from kind of the age of 20 to say 50 zone, ideally to have that many people want to have it all the time. Of course the likelihood of getting a critical illness increases the more that you age.
47:00
But if you're building up a proper asset source like you've been working on The Infinite Banking Concept, you own dividend paying life insurance, you're building up a reservoir, maybe you're becoming. I don't like to say this but I'll use the air quotes again. Self insured relative to critical illness because you've built a nest egg that allows you to have liquidity in the event of an event. So there's many things to consider there. I'm not going to go deep dive into criticalness on this. And also a little bit of a disability recommendation. So that, that is an example of this. I'm going to go back for a second and I'm just going to make a couple of tweaks so we can see a variation of this.
47:34
Let's, I hit the back button. I will go, I'll, I'll switch to Canada. We'll use Ontario.
47:40
Let's adjust the age to 50. In this scenario, I'll move the income up a little bit and in this case we'll say we have a partner, but they're not stay at home and they've got an income of 110.
47:56
Okay. Dependent children, we only have, let's say one that's still dependent and that child is age 13. Okay, great. So I've made total different modifications here. Let's see, I Will uncheck group coverage. I'll uncheck corporately owned.
48:16
I'm going to put a unchecked up this. I'll do a power whole life. Let's say we have 500 with a term.
48:24
The term insurance will make this as 1.2 million and it was issued in 2012 and we have a permanent PAR policy. Let's just say it's 500,000 and it was started in 2020 and there is a rider to that. So number one, let's say we have a child protection rider and we'll add a term for another 20 years.
48:51
And that term insurance was a million bucks bucks.
48:55
Okay, great.
48:56
So we've completely redesigned the, the illustration here that we're looking at now. Again, I switched to Canada. It's suggesting, okay, in Ontario you should plan for 50 grand. Again, do you want to know why that is? Well, it's giving you a list here based on the different provinces. What are some things you can anticipate for what we should be paying for. Obviously Alberta is very low because there's not really, there's, there's no probate, estate tax issues. It's just, it's just a flat kind of fee. All right, so a little bit different as we go province to province. And so it's suggesting just to cover the basic final expenses and then adding a transition fund, etc, you know, so you can tweak on here. Do you want cremation? So you can, you can toggle and play with a variety of things on this. It's very helpful.
49:37
And income replacement. Now in this case it's suggested only 11 years of income replacement. So I'll say, you know what, I'm good with just 10. Let's do that. Debt obligations.
49:48
Maybe I just refinanced the mortgage. I'm in Ontario, I just bought a new place and the mortgage is a million. I have a home, equal line of credit. Maybe there's a couple of credit cards from the recent move.
49:59
And you know what, we have a loan because we did some renovations on the property for a new kitchen when we moved in. Let's make that 80,000 and I'll uncheck family loans. Okay, so we have a slightly again different scenario, education funding. We only have the one kid cost per year.
50:16
I already have something set aside. Let's say I'm only going to plan for 20k and hit results. Okay. Hey, here's your protection picture. Now it's saying I don't need any new coverage today because I have 2.7 million.
50:30
My protection need is right in that zone. I have a little bit of human life value remaining. So this is quite interesting. Now the same assets we put in before are still in place there.
50:41
So if we wanted to adjust the assets we would, we would, we could play around with that. The key thing that I want to see here is that number one, we have a little bit of human life value remaining. But this family is actually protected in that there's enough to cover all the required obligations that they've set in place. All the debts, little education fund and income replacement because both spouses were earning money. And the gap from higher income to lower income spouse wasn't as drastic. Hey, if you're getting value from this and you haven't subscribed yet, hit the subscribe button right now look, we're marching towards 10,000 subscribers and every single one helps us bring more powerful content on taking control of your money.
51:19
So you can see the income replacement here number has shifted drastically from that vantage point. A lot of debts to pay off, etc.
51:27
What is also interesting about this though, their human life value remaining is only 450,000. So let's say the same individual gets booked in my calendar and says hey, I'd like to implement The Infinite Banking Concept. Can we, you know, strategize? We have a big conversation. They want to move forward. They've got really good revenue, really good household income, they've got great cash flow and they actually want to deploy this with some large capital. Maybe they want to put $100,000 a year in, or $50,000 a year into a, into a well designed, constructed par policy.
52:01
Well, we only have $450,000 of human life value remaining. So now is where we would need to look at creating a cover letter explaining and providing rationale for the insurance. If we're requesting greater than that number because of what they already have in place and, or if we go back and we assess. So just to you know, give this one more scenario because we got term issues here, term renewal risk. Right. So if we take a look, well, what do you have already for your current insurance?
52:31
Well, if I go back and we look, well, we have this term insurance of 1.2 million. It was issued in 2012.
52:37
It's 20 years. Well in 2032, which is not that many years ahead, that premium is going to spike like a rocket ship. And a big chunk of what's protecting your family right now is this. And, and you're, you're 13 year old. That gets you right about to the point where, you know, maybe out of the house, dependent. Of course, in Canada these days, most a lot of kids living at home stay living at home for a long time because it's very difficult to buy a house in Canada these days with the way the economy is. But does it make sense to look at saying, okay, should we consider replacing this? Because we're getting new coverage anyway, restructuring based on what's going on. So we optimize for the new decisions, the new goals that you have in mind.
53:20
And that's where the conversation gets really customized. So there's a lot of great things we can do here. The key thing is that this is a great tool available. Of course, if you have any questions, you can chat over here with Alex and ask some questions. Let's just give that a shot.
53:37
What can you tell me about my scenario?
53:41
Let's see what Alex has to say about this.
53:45
Okay, great to meet you, Richard. Happy to walk through it. Your protection need is estimated a total Protection protection needed, 2.7 the gap result, et cetera, et cetera.
53:56
Since you already have 2.7 million in place, you have about 450 in remaining capacity. Think of this as a ceiling an insurance company might allow if you wanted to get more coverage. That's exactly what I was just talking about. Good job, Alex. Well done.
54:09
Since you're on existing coverage step, many people find it helpful to double check if their 2.7 in term might expire at a certain age. So again, what I was referencing is do we need to think about extending this, replacing it in some way?
54:23
And you know, Alex did a great job here giving us some insight. So Alex is just a coach, it's not an insurance advisor. It's just here to provide insights and questions about what you're filling in, help you understand more about your, your situation. So there you go. There's a bit of a rundown on our amazing tool. Again, you can find the tool over@lifevalueplanner.com that's lifevalueplanner.com and check it out. Go ahead, give it a whirl. Let us know. Leave a comment below on if you've ever. First of all, if you understood what human life value was. Secondly, if you recognize the importance of planning for that really critical replacement income piece.
55:01
Third, did you get a chance to try out the tool? Head over to lifevalueplanner.com and give it a whirl and let us know what your result. Well, not just what your results, but what did you find using it and then if you have any feedback for us to improve, we'd be happy to know that too, and we can make some adjustments. So thanks so much for watching. Again. The magical recommendation engine just threw some videos up there that you should click on and watch because it's great content. Thanks for tuning in.