Claude C. Lilly, University of North Carolina at Charlotte and TIAA-CREF Institute Fellow
March 2006 |
A fundamental part of risk management for individuals, like companies, is to preserve and protect assets. For the individual, the greatest asset frequently is her or his earning capacity. The death of an individual results in the loss of this asset. Life insurance is a risk management tool available to protect against this loss.
This Trends and Issues report focuses on two themes. The first and most important is a general process for examining how an individual should determine the amount of life insurance coverage necessary. The second is an examination of the environment that affects the process.
Estate planning models can provide an economic framework for determining the resources necessary to meet estate planning needs. Life insurance is a key resource in the estate planning process. Ascertaining the amount of life insurance necessary, like the estate planning process, should be done on a continual basis. The amount of coverage should be re-evaluated every time there is an important change in an individual’s environment. There are three factors that affect an individual’s environment: personal factors, economic factors and social factors. There often is an overlap between these sets of factors.
How much life insurance should an individual purchase? The answer is “The amount of coverage needed is not constant.” It varies over time, sometimes significantly. It is always equal to the difference between an individual’s goals and an individual’s resources. While models may include many of the concepts in this paper, it should be noted that an individual should always rely on their own analysis. The key to determining the amount of insurance is continually reviewing goals and resources. By doing this, a consumer reduces the impact of changes in societal, economic and personal factors.