How is Insurance Rate calculated?

Life Insurance

How to calculate the Life Insurance Rate for a client:

Life Insurance Rate = Current Coverage / Estimated Coverage Needed

Current Coverage = the sum of all death benefits for any personal life insurance policy where the client is the “Owner”.

Exclude buy-sell and key person life insurance policies regardless of who owns them. These are business life insurance policies, not personal life insurance policies.

Estimated Coverage Needed = HH Estimated Spending Need - HH Adjusted Net Worth

HH Estimated Spending Need = 30 * HH’s Annual Spending (the Term Elements denominator…i.e including debt payments)

HH Adjusted Net Worth = (Total NW) - (Sum of all Primary Residence Real Estate equity) - (Sum of all business equity)

Disability Insurance

Disability insurance coverage rates are calculated at the individual person level for any Head of Household in a given household. So if there’s one HOH, there is one disability insurance rate. If there are two HOHs, there are two disability insurance rates.

Disability Insurance Rate = Current Coverage / Estimated Coverage Needed

Current Coverage = the sum of all monthly benefits for any personal disability insurance policy where the client is the “Owner”. Exclude Business Overhead Disability regardless of who owns it. This is a business disability insurance policy, not a personal disability insurance policy.

Estimated Coverage Needed = Personal monthly income

Personal monthly income = Sum of all income owned by Jim

Liability Insurance

Unlike LI and DI coverage, liability insurance coverage is calculated at the household level, not the individual person level.

How to calculate the Liability Insurance Rate for a household:

Liability Insurance Rate = HH’s Current Coverage / HH’s Total Net Worth

HH current liability coverage = the sum of all coverage amounts on all personal liability insurance policies where the owner is client or spouse. Exclude Malpractice Liability and Business Liability regardless of who owns it. These are business liability insurance policies, not personal liability insurance policies..

HH Total Net Worth = as it sounds. Everything.

Explaining the Insurance rate

While the average of multiple individual insurance rates doesn’t produce a meaningful score on it’s own (in other words, a 55% Insurance Rate means nothing to the outside world, advisors and clients alike), it does accomplish some key principles of an Elements score:

• The Insurance Rate calculation is simple for clients (in this case, as simple as a derivative calculation can be). “What's the Insurance Rate?” “It’s your average coverage rate for life, disability, and liability insurance.” Yes, the underlying calculation will ultimately need to be explained, but to a client on the surface, it’s simple. The higher the score, the more secure.
• The Insurance Rate is objective. As a straight average of underlying scores, there’s no subjectivity in the overall score. Yes, the underlying insurance needs calculations require subjectivity to determine “needs” (this is unavoidable), but our assumptions are very simple, conservative, and limited in number. This calculation is as objective as it can be.
• It serves as a meaningful backdrop to a conversation. The score reacts to a client’s current financial data, indicating their current insurance coverage health. And while the number itself is less standardizable than, say, Total Term or Savings Rate, it ultimately prompts a conversation around Insurance which is otherwise a complicated topic that has all sorts of nuances that Elements leaves to the advisor, insurance brokers, and other insurance calculation tools to more precisely solve.

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