Coverage sized to the obligation, not to a rule of thumb.
A death benefit is not a product decision. It is the number that keeps the rest of the plan intact if the person funding it is gone.
“Ten times income” is a sales heuristic, not a calculation. The right number comes out of the plan: what has to be paid off, what income has to be replaced and for how long, what is already funded, and what the estate will owe in the first nine months.
U.S. adults who say they need life insurance or more of it1
households that would face financial hardship within six months of losing the primary earner1
treatment of death benefits received by a beneficiary under IRC §101(a)2
Start with the liability, then price the coverage
We build the number from the obligations it has to retire: outstanding mortgage and debt, the number of years of income the household needs replaced, education costs still ahead, final expenses, and any liquidity the estate will need so heirs are not forced to sell an illiquid asset on a deadline. Against that we net what already exists: group coverage, existing policies, invested assets, survivor Social Security.
What is left is the gap. Only then is it worth discussing term versus permanent, laddering, or convertible term, because those are answers to how long the gap lasts and how certain it is.
The gap is wide, and it is not only a coverage problem
LIMRA’s annual Insurance Barometer Study has consistently found that roughly 100 million American adults say they either need life insurance or need more of it, and that about four in ten households would face financial hardship within six months of losing their primary wage earner.1 Those are population figures, not a statement about your household, but they are a fair description of how often this decision is deferred.
Deferral has a price beyond the uncovered risk. Pricing and eligibility are driven by age and health at application, both of which move in one direction. A policy applied for while healthy and kept in force is a different instrument from the same policy applied for after a diagnosis.
Structure decides who gets the money and how it is taxed
Death benefits paid to a beneficiary are generally excluded from the beneficiary’s gross income under Internal Revenue Code §101(a).2 That is an income-tax rule, not an estate-tax rule: a policy you own on your own life is generally includible in your gross estate. For larger estates, that is exactly why ownership and beneficiary structure, including whether an irrevocable trust should own the policy, is a conversation with your attorney before the application, not after the policy is issued.
Beneficiary designations override wills. We review them alongside the rest of the estate plan, because a stale designation is the most common way a well-drafted estate plan is quietly defeated.
Group coverage is a floor, not a plan
Employer coverage is inexpensive and worth having. It is also usually a multiple of salary, frequently capped, generally not portable when you leave, and not underwritten to your household’s actual obligation. We treat it as the first layer and size individual coverage on top of it, with attention to conversion rights and portability before a job change rather than during one.
The plan produces the number. It knows the mortgage balance, the years of income the survivor needs, the education funding still outstanding and the estate’s liquidity need. Change the plan and the coverage changes with it, which is why we re-test the number at every review rather than at every renewal notice.
- LIMRA and Life Happens, Insurance Barometer Study (annual): self-reported life insurance need gap and household financial vulnerability following loss of the primary wage earner. View source ↗
- Internal Revenue Code §101(a); IRS Publication 525, Taxable and Nontaxable Income: general income-tax exclusion for life insurance proceeds paid by reason of death. View source ↗
Figures are as of the period stated by each source and are subject to change. Statistics describe populations and are presented for education only; they are not a projection of any individual result.
Insurance products are offered through licensed insurance professionals and are not investment advisory services. Product guarantees are subject to the claims-paying ability of the issuing insurance company. Availability, underwriting outcomes, pricing and contract provisions vary by carrier, state and applicant, and no coverage is in force until a policy is issued and delivered. Other Side Asset Management does not provide legal or tax advice.
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