Back in the day….In a much simpler time there used to be a stock answer to how much life insurance a person should carry. There was no real need for a drawn out needs analysis. Life was simple.
How much life insurance do I need? Well, ten times your annual income. The logic was that if you passed away your beneficiary could put that money away in an investment vehicle that allowed for withdrawals “that would produce at least 10% annual return”, so your beneficiary could literally live off the interest leaving the principal intact for emergencies or to pass on as a legacy to their beneficiaries.
Then came 2008 and that assumption somehow no longer seemed to make sense since your investments were losing money, not gaining at least 10%.
One of the problems for many people is that companies have “financial underwriting” guidelines that restrict how much insurance they will be a party to on an individual, based on a multiple of income. Those tables haven’t changed since the 80’s when interest rates were well into the teens and a person could certainly justify no more than 10 times their income as adequate replacement.
Just yesterday Prudential took the lead in addressing the fact that the old guidelines don’t adequately reflect today’s incomes and today’s economy. They were the first to say out loud that people have the same insurance issues they did three years ago in a healthy economy, but they have less income.
Bottom line. These new guidelines will allow us to provide insurance that more accurately reflects the insured’s needs without being restricted as much by the income/insurance ratio.