Life Insurance Should Solve a Defined Financial Problem.

The first life-insurance question is not term or permanent. It is: what financial problem has to be solved if this person dies?

That question sounds simple. It changes the whole review.

I think coverage should have a job, an amount, a time period and a person responsible for keeping the plan current. Without those four things, the conversation can turn into a product comparison before the client has defined the need.

Name the job of the death benefit

For one family, the job may be to replace income while children are young. For another, it may be to pay a mortgage, fund education or give a surviving spouse time to make decisions. A business may need liquidity for a buy-sell obligation, a key employee or debt. An estate may need cash available at the right time.

Those needs should not be mixed into one vague target. Family income replacement and business succession are different problems. They may require different owners, beneficiaries, amounts and review processes.

And so write the purpose in one sentence. If the sentence is unclear, the coverage decision will be unclear too.

Calculate from obligations, resources and time

Income multiples are easy to remember. They can also be too broad. Two clients with the same income can have very different debt, savings, family responsibilities, business interests and survivor income.

I would start with what the survivor or business actually needs. Which obligations continue? Which income stops? What assets are available without creating another problem? How long does the gap last? What inflation or investment assumptions are being used?

The answer does not have to be exact to the dollar. It does need to be connected to the plan. A rule of thumb can begin the discussion. It should not end it.

Let the policy structure follow the need

Term insurance and permanent insurance solve different problems and carry different costs, guarantees and risks. The right structure depends on the duration of the need, affordability, insurability, policy features and how the client expects to use the coverage.

The NAIC’s Life Insurance Buyer’s Guide encourages consumers to understand the policy, compare costs and consider what happens if they stop paying or replace coverage. That is practical advice. A lower illustrated premium or a larger projected value does not answer whether the contract will do the job the client assigned to it.

Look at the guarantees. Look at the non-guaranteed assumptions. Look at the surrender terms and any loans. Then ask whether the client can reasonably maintain the policy.

Ownership and beneficiaries are part of the tax review

Life-insurance proceeds are often discussed as if the tax answer is automatic. The IRS provides an interactive tool because the result depends on facts such as whether a policy was surrendered, who received the proceeds and whether payments include interest.

Ownership can matter for estate and gift planning as well. I would not change an owner or beneficiary because someone heard that a particular structure ‘saves taxes.’ The attorney, tax professional and insurance professional need to review the actual policy and the client’s objectives.

The policy can be correct and the ownership can still create a problem. Review both.

A hypothetical business owner with two needs

Consider a hypothetical owner whose spouse depends on the owner’s income and whose company has a bank loan plus a buy-sell agreement with a partner.

One large policy may appear to cover everything. But who owns it? Who is the beneficiary? Does the agreement define the required funding? Is the bank expecting separate collateral or coverage? What amount supports the family after business obligations are met?

The cleaner approach is to separate the jobs. Evaluate family protection from household cash flow and obligations. Evaluate business coverage from the agreement, debt and continuity plan. Coordinate the pieces, but do not pretend they are the same need.

Review the policy while there are still options

An insurance review should confirm the original need, current amount, owner, beneficiary, premium schedule, guarantees, policy performance and any loans or withdrawals. It should also ask what changed in the family, business and estate plan.

Do not cancel existing coverage until replacement coverage is fully approved, issued and reviewed. Health and underwriting can change. So can cost.

Name the job of each policy in the file. If nobody can explain what a policy is meant to do, that is the next conversation. The earlier the review happens, the more flexibility the client usually has.