Life Insurance Capacity Calculator
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1 Life Insurance Capacity Calculator LIFE For agent INSURANCE use only. Not for public distribution. Your future. Made easier.
2 Life Insurance Capacity Calculator What is it? The ING life companies Life Insurance Capacity (LIC) Calculator is a life insurance sales tool which can be found in the financial calculators section of ING Presents. It is a calculator designed to increase life insurance sales opportunities by supplying agents with two valuable pieces of information: 1. An estimate of the maximum amount of coverage that could be in force today (Life Insurance Capacity), and 2. An estimate of the portion of that capacity not currently being used (Insurability Reserve). The LIC Calculator estimates Life Insurance Capacity by applying the ING life companies financial underwriting guidelines (see ING Life Underwriting Requirements Guide #113151) to financial information provided by a client/prospect. Then it subtracts out the amount of life insurance coverage currently in force (from all insurers) to estimate how much of the total capacity could potentially be purchased today. A fact finder for obtaining the financial information needed to run the LIC Calculator is printed in Appendix #1. Verification of finances may be required during the underwriting process. LIC Calculator estimates are based on information provided by the client and applied to the ING life companies financial underwriting guidelines. The estimate is non-binding and is subject to change after review of full underwriting requirements. The amount of life insurance that may be offered by the ING life companies depends on many additional factors. These factors may include the client s health, the type of financial documentation provided and any additional information obtained during the underwriting process. If the applicant s medical classification is assessed as Other than Applied For, then his/her Life Insurance Capacity may require adjustment. The LIC Report does not represent a formal offer of life insurance coverage. How Can This Tool Help Me? The Life Insurance Capacity Calculator has the potential to help agents licensed with the ING life companies in two important ways: minimize financial underwriting problems increase life insurance sales Minimize Financial Underwriting Problems The LIC Calculator may help you avoid financial underwriting problems. Because all calculations are performed using the ING life companies financial underwriting guidelines, it provides an estimate of the upper limit of the total life insurance coverage underwriters will likely deem appropriate for a particular person. Further, it also estimates potential coverage limits for different categories of death benefit needs, including both personal coverage and business coverage: Personal Coverage Categories Income Replacement Estate Taxes and Liquidity Charitable Giving Business Coverage Categories Buy-Sell & Stock Redemption Business Debt Repayment Key Executive Coverage Even if the LIC Calculator is not used as part of a client presentation, an agent may still use it to understand how much coverage the ING life companies may likely consider issuing for a particular applicant. The agent may then structure client communications accordingly. If a client wishes to apply for more coverage for a particular need than the LIC Calculator estimate, then the agent knows in advance that additional supporting information will be necessary for underwriting review. When submitting life insurance applications, agents should consider including a copy of the applicant s Life Insurance Capacity Report with their cover letter. Including the LIC Report could potentially speed up the financial underwriting process.
3 Increase Sales Many people take a minimalist approach to buying life insurance. They may consider life insurance premiums as an expense that needs to be minimized. They may do this by buying the smallest amount of death benefit coverage they feel they need and then structure the policy so they pay the smallest annual premium possible. This minimalist approach increases the possibility they will be under-insured and/or that their coverage will lapse before they die. The LIC Calculator provides an opportunity to re-frame the life insurance discussion by engaging prospects to look at life insurance coverage from a different perspective. It has the potential to break through the minimalist mentality by pointing out: Life insurance is an asset,* not an expense; if properly managed, life insurance policies have the potential to deliver thousands of dollars of income tax-free death benefits (under IRC Section 101) to loved ones (when they are named as policy beneficiaries). Although their survivors may not need life insurance death benefits, wealthy people regularly buy life insurance because it offers a unique combination of potential advantages that may help them accomplish their financial goals. Financially savvy people proactively manage their policies and their insurability through a formal process to help make sure they have the right amount of life insurance coverage in place at the right time and at the right cost. * For more information on Life Insurance as an Asset Class, review the ING life companies extensive materials in the Wealth Transfer/Estate Planning section of Advanced Sales in the ING for Professionals website. A Process for Managing Insurability Because life insurance has the potential to deliver thousands of dollars of death benefits free of income taxes, managing a client s insurability can be just as important as managing other financial assets. Financially smart people usually manage their insurability in five steps: 1. Estimate Their Life Insurance Capacity. Based on age, income and net worth, life insurance companies establish financial limits on how much coverage they are generally willing to issue to individual applicants. The maximum amount of coverage that could be in force today is called their Life Insurance Capacity. 2. Determine Their Insurability Reserve. Few people use their entire Life Insurance Capacity. The portion of their available Life Insurance Capacity which is not currently being used is their Insurability Reserve. It is determined by totaling the amount of coverage from all inforce policies (from all insurers) and subtracting this total from the person s Life Insurance Capacity. 3. Decide How Much of the Insurability Reserve to Use. After reviewing their current financial situation and goals, the individual decides how much (if any) of this Insurability Reserve to use today. This amount can be allocated between cash value life insurance and term insurance. 4. Apply for This Additional Coverage. Apply for desired additional coverage and structure the amount, type of coverage and premium paying strategy appropriately. Information about health and medical condition will be required along with documentation verifying their financial information. After all financial and medical requirements are satisfactorily completed, a policy for the additional coverage may be issued. 5. Regularly Review Existing Life Insurance Policies and Insurability Reserve. They review their inforce policies at regular intervals to make sure they are performing properly. They also re-calculate their Insurability Reserve regularly to determine if they still have the right amount of life insurance coverage at the right cost. Annual reviews can be an efficient way to manage both inforce policies and Insurability.
4 A Person s Insurability Reserve Is Temporary An individual s Life Insurance Capacity (LIC) changes over time. Changes in age, earned income and net worth directly impact a person s LIC. As a person ages, his/her Insurability Reserve is likely to decrease. At some point, a person s Insurability Reserve may disappear altogether. When this happens, he/she may no longer be able to purchase additional life insurance coverage, regardless of how much they may want it or how badly their family needs it. Unlike most other financial products, life insurance may not be available for purchase when it is most needed. It s a financial product that generally must be purchased in advance of the time the death benefit will be needed. This is why managing Insurability is so important. People who manage their Insurability well shouldn t have a problem because they will have the right amount of coverage at the right cost and structured in the right way. How Does the LIC Calculator Work? The Calculator is designed to apply the ING life companies current life insurance financial underwriting guidelines to individual situations. These guidelines consider two financial areas for potential life insurance coverage: (1) personal needs and (2) business-related needs. Based on information the client provides, the LIC Calculator applies the financial underwriting guidelines to estimate the maximum allowable life insurance death benefit to cover both personal insurance needs and business insurance needs. The Calculator then subtracts out the amount of personal and business life insurance currently in force to determine the individual s Insurability Reserve. This is the amount of unused personal or business life insurance capacity that is potentially available for purchase. Personal Life Insurance Capacity Personal life insurance needs are divided into three components. The maximum estimated coverage for each component is computed and then added to the other components in order to determine a person s total personal life insurance capacity. Coverage currently in force issued by any insurer (including the ING member companies) is added together and this sum is subtracted from the individual s total personal life insurance capacity. The three components of personal life insurance capacity include: 1. Earned Income Earned income is multiplied by a stated factor from the financial underwriting guidelines which is determined by the individual s age. 2. Federal Estate Tax Liquidity Needs An individual s future estate tax liability depends on many factors and is very difficult to estimate. The LIC Calculator estimates estate tax liability through this procedure: (1) the estimated current estate value is projected to grow at a 6% annual rate for the lesser of 15 years or the client s remaining life expectancy (as determined by the 2001 CSO Table); (2) $1,000,000 is subtracted from this projected sum; (3) the remainder is multiplied by 50%. The estate tax liability amount stated in the report is not a detailed estimate and should not be relied upon in the client s personal planning. Clients should consult with their legal and tax advisors for a detailed estimate of their estate tax liability. Future changes in federal estate tax laws may change the procedure for estimating estate tax liabilities. 3. Charitable Giving The availability of life insurance coverage for charitable giving depends on the individual s recent charitable giving history. The Calculator s estimated coverage for this component is based on the actual charitable gifts he/she has made over the last three years. Total charitable gifts made over the last three years are averaged. This average is then multiplied by the lesser of 10 years or the donor s remaining life expectancy (as determined by the 2001 CSO Table). Personal insurance needs must be fully met before charitable giving coverage may be purchased.
5 Business Life Insurance Capacity Some people own an interest in a business or are key employees in a business (or both). When this is the case, additional life insurance coverage may potentially be available to cover business life insurance needs. The ING life companies financial underwriting guidelines estimate three components of business life insurance needs. 1. Key Executive Insurance This coverage is based on the key employee s current salary from this business. This amount is multiplied by up to a factor of Business Succession/Buy-Sell/Stock Redemption This coverage is based on the verifiable current value of the business multiplied by the individual s percentage of ownership. Only business value as of the date of the report should be considered; potential future growth of the business is not considered under the ING life companies financial underwriting guidelines. 3. Business Debt Repayment Business debts (e.g., loans) with a repayment period of at least 5 years are multiplied by a percentage of 75%; the business should be the owner and beneficiary of the policy. These three components are not interchangeable and must be kept separate. An application to use part of an individual s Business Life Insurance Reserve should specify which of the three components of business life insurance capacity he/she wishes to purchase: Key Executive Coverage, Business Succession/Buy-Sell/Stock Redemption or Business Debt Repayment; and must not exceed the capacity available for that specific component. Before a new life insurance policy for either personal or business needs will be issued, the applicant must be able to verify all financial information on which the application is based. Thus, if the estimates provided in the LIC Calculator are to be useful, the inputs should be realistic and capable of immediate verification. How Does the LIC Calculator Lead to New Sales? Introducing the LIC Calculator to a Client/Prospect Have you ever wondered how an insurance company looks at your insurability? Insurance companies are in a unique position. On one hand, if you are healthy, they want to sell you death benefit coverage. But on the other hand, they don t want to sell you so much that the death benefit exceeds your needs or ability to pay for it. So they establish financial guidelines to help them decide the maximum amount of coverage to offer. These guidelines initially only consider your finances and not your health or other factors. If you answer a few simple questions, I can show how the ING life insurance companies might evaluate your insurability based solely on your finances. The LIC Calculator highlights two valuable pieces of information for an individual: (1) his/her total Life Insurance Capacity and (2) his/her current Insurability Reserve. Once you ve run the report, ask this simple question: Does it make financial sense for you to use some of your Insurability Reserve to provide more protection for your family or your business? In some cases it will be obvious to the individual that he/she is under-insured and that they should try to do something about it. Some people will immediately see that their spouse or family is under-protected; some business owners may quickly see that their business succession plan is under-funded or that their key executive coverage isn t what it should be. Sometimes the report may introduce them to uses of life insurance they may not have considered before (e.g., charitable giving or business debt repayment). An important benefit of the LIC Calculator is that it brings many aspects of their life insurance situation together in one simple report.
6 Some people may want to purchase additional coverage, but may not want to do it now. They may want to put it off into the future. Of course, the obvious risks of waiting are a change in health status which could either make them uninsurable or increase the premium cost substantially. In addition, there is another risk the risk that the amount they qualify for financially could decrease significantly. The LIC Calculator may be able to effectively demonstrate this risk. All you need to do is increase the individual s age in the input section by 3-5 years (or whatever amount of time they indicate they want to wait). The revised report may show a smaller Insurability Reserve. Thus, even if their health remains unchanged and their underwriting classification remains the same, the amount of new coverage they can apply for may be reduced below the amount they want to purchase. If you sense some reluctance to purchase additional coverage, consider following up with this question: Is there a reason why you wouldn t want to use some of your Insurability Reserve for your family or your business? Answers to this question could be valuable for you in deciding where to take the conversation. Often, whether directly stated or not, paying additional premiums may be the underlying concern. Most people don t object to acquiring additional life insurance; many would actually like to have additional life insurance coverage. The problem is often the premium; they re not sure where the funds to pay additional premiums will come from or how they will adjust their budgets to pay the payments. If this is the case, you have the ability to move the discussion to different strategies for paying premiums. Some of the possible strategies available include: 1. Policy Review/TOLI Policy Review Analyze the status of the policies currently in place to see if any are inefficient or inconsistent with their current objectives; newer, more efficient policies may be available and may generate some premium savings to pay for additional death benefit coverage or used for other financial needs. Be aware that there may be replacement costs, however, such as surrender charges on existing policies. 2. Executive Benefits Business owners or key executives may be in a position to have their business pay some or all of their life insurance premiums. A number of selective benefit strategies use business funds to pay part or all of the premiums (e.g., Section 162 Bonus Plans, REBA Plans, Endorsement Split Dollar Plans, and Split Dollar Loans). 3. Consider Purchasing New Coverage Inside a Qualified Pension/Profit-Sharing Plan If the client is a participant in a tax-qualified pension or profit-sharing plan, it may be possible for the plan trustee to purchase the policy for the client s plan account and pay the premiums. Several conditions must be satisfied in order to use this strategy. First, the plan must allow life insurance to be purchased as a plan investment. Then, the plan trustee must be willing to use life insurance for this participant. The trustee must sign the application and the plan will own the policy. The beneficiary designation is split with the plan receiving death benefits equal to the policy cash value with the balance paid to beneficiaries named by the insured plan participant. The plan participant must recognize additional taxable income equal to the economic benefit value of the death benefit (e.g., an economic benefit split dollar arrangement). 4. Premium Financing Wealthy clients who meet the ING life companies premium financing guidelines may be able to enter into a premium financing arrangement in which policy premiums are borrowed from a commercial lender. Premium financing arrangements are complex, but may be a viable payment strategy for high net worth clients who are unable or unwilling to use their own funds to pay premiums. See the ING life companies Premium Financing materials for further details. When submitting life insurance applications, agents should consider including a copy of the applicant s Life Insurance Capacity Report with their cover letter. Including the LIC Report could potentially speed up the financial underwriting process.
7 Appendix #1 Life Insurance Capacity Calculator Fact Finder Life insurance is a valuable financial tool. The ability to purchase life insurance coverage is valuable and should be managed carefully. Estimating Life Insurance Capacity can help manage insurability to keep the family financially secure. Managing Insurability with the Life Insurance Capacity Calculator Gather the information below about the client s personal and possible business situation. Client Name: Issue Age: (20-85) Sex: M F Personal Life Insurance Capacity Annual earned income Value of the taxable estate Charitable giving last year Charitable giving two years ago Charitable giving three years ago Personal life insurance in force Answer the following to include business related Life Insurance Capacity Annual earned income from the business If the client is a business owner: Value of the business $ Percent of ownership % Business loan for which the client is personally liable, with a repayment period of at least five years (excluding mortgages) Business Continuation life insurance in force Key Person life insurance in force Business Debt repayment life insurance in force
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