Negative Net Worth and Life Insurance Capacity

Pancur

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IL
Hi,

How negative net worth affects the amount of life insurance coverage one can get?

I have a 40-year-old customer who would like to apply for 30 year term $1,500,000 DB but his net worth is -$161,000. His assets worth is $41,000 and liabilities (mortgage) $201,000.

Net Worth = $41,000 - $201,000 = -$161,000

I know that the bigger net worth the more life insurance you can get. Since this customer has very little in comparison to what he owes does it mean that he qualifies for less as well?

On the other hand his life insurance needs are bigger that a person's with the same income, family situation etc. but with positive net worth.

I'm assuming that a lot of you on this forum have customers with negative net worth so you'll know the answer to my question.

Thank you in advance for helping me understand the issue.
 
I think you're looking at the math a little funny. If he has a $201,000 mortgage and assets of $41,000 you're probably not including the value of the home the mortgage is. If he has a decent amount of equity in the house that actually will add to his net worth.

That said, what is his yearly income? Does he have any other debt?

One other thing that should probably be your starting point when you're discussing life with folks is why does he want $1.5mm? If he makes $150k/year and he's trying to replace 10 years of income that would be a much easier sell to an underwriter than if he makes $30k/year and is trying to make everyone in his family rich when he dies.
 
Negative networth further supports the life insurance purchase. Dude's got debts that need to be taken care of. 1.5 mill might be a tough sell depending on his income, but his negative networth helps.

It isn't about hard and fast rules, there are several reasons for buying life insurance, you just need to explain the reason and, when the case is large enough, support the claim. 1.5 mill may or may not trigger the switch that calls for supporting evidence, depends on the company.
 
If he has a $201,000 mortgage and assets of $41,000 you're probably not including the value of the home the mortgage is. If he has a decent amount of equity in the house that actually will add to his net worth.

That said, what is his yearly income? Does he have any other debt?

One other thing that should probably be your starting point when you're discussing life with folks is why does he want $1.5mm? If he makes $150k/year and he's trying to replace 10 years of income that would be a much easier sell to an underwriter than if he makes $30k/year and is trying to make everyone in his family rich when he dies.

You're right. I didn't include his house value because he only paid $30,000 into the mortgage. The rest of his assents are his car and personal belongings.
Should I include his house value of $230,000 ($30,000 that he paid and $200,000 that he still owes) in his assets?

As to his income and life insurance needs. He makes $47,000 a year , his wife is unemployed and he has two kids that are 2 and 4 years old.
The need calculation is pretty simple. He wants to secure his income before his kids go to college and then he also want to make sure they got enough money to get good education ($500,000 = $250,000 per one kid = $50,000 per year x 5 years of studying).

What do you think, is it enough to qualify for $1,5M? And should I include his house value in his assents even if he paid only $30,000 into the mortgage?
 
Baring any other debt, he actually does have a positive net worth. If the house is worth $230k and he only owes $200k, that ads ~$30k to his net worth. That said, the net worth isn't anything we really need to focus on.

The first thing you should do is take a look at his income and the multiplier the carrier will let you get away with there. I don't have any sheets in front of me, but I imagine you could get away with at least 20 years which already gets you to almost a million. Add the debt on the house plus leaving money for the kids and I think you realistically have yourself at 1.5m.

Do you already have a carrier for it? You could always give underwriting a call to get an idea of what their trigger points are.
 
Based on his income, you will have trouble getting this past an underwriter. You are crossing that 20 times income threshold, which will probably require some supporting information. Yes, carriers will vary, but to me, the financial underwriting on this doesn't make sense, before you even get to his networth.

If he had a high networth, it would still make sense, but he doesn't, regardless of how you position it. You'll have to find a carrier that will accept a 31 times annual earnings, which will be a challenge at over a $1m db.

Dan
 
Based on his income, you will have trouble getting this past an underwriter. You are crossing that 20 times income threshold, which will probably require some supporting information. Yes, carriers will vary, but to me, the financial underwriting on this doesn't make sense, before you even get to his networth.

If he had a high networth, it would still make sense, but he doesn't, regardless of how you position it. You'll have to find a carrier that will accept a 31 times annual earnings, which will be a challenge at over a $1m db.

Dan

Strongly disagree.
Don't think this will be a problem, I don't even think they will ask anything about his assets other then what is on the primary app.
Income replacement, debt coverage, and some college money, it really is pretty cut and dry.
 
Just write a cover letter with the application to explain the amount being applied for and why.

You guys are WAY over-thinking this!
 
Strongly disagree.
Don't think this will be a problem, I don't even think they will ask anything about his assets other then what is on the primary app.
Income replacement, debt coverage, and some college money, it really is pretty cut and dry.


Do you disagree because you routinely place cases at 31 times annual earnings or do you disagree because the amount is appropriate?

Justifying a $1.5M DB isn't usually a big deal, just when I've submitted cases at this type of earning multiples, the underwriters have asked questions. They don't stop it, but they have to justify it.

Most of mine have been where a person is suddenly making less then they have in the past, so it's pretty easy to justify, but you will find most carriers have a chart that shows allowable death benefit to income, based on age. This probably exceeds the norm that will go through unquestioned.

A cover letter explaining why this coverage is needed is usually all it takes though.

Dan
 
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