2.8 - Determining Amount of Personal Life Insurance Needed

Question 1

Determining Amount of Personal Life Insurance Needed

Answer 1

Two of the approaches used to determine the need and amount of life insurance are human life value and needs analysis.

Question 2

Human Life Value

This method takes inflation into consideration when determining the amount of insurance coverage needed.

Answer 2

This approach is a measure of the projected future earnings of a person at risk in the event of their premature death. The objective is to provide the proper amount of coverage as determined by the value of the individual to their dependents, using the rate of inflation and the individual’s:

• Age and gender
• Occupation
• Annual wage and employment benefits
• Planned retirement age

Question 3

Needs Analysis

Answer 3

This approach determines a need for coverage upon the premature death of an individual. It always assumes the death of the individual to be immediate and factors the following items into arriving at the proper amount of coverage needed:

• Calculate all financial needs caused by an immediate death, including debts, medical bills, and final expenses
• Provide lifetime income to the spouse
• Pay off a mortgage or other debt
• Provide funds for children’s education
• An Emergency Reserve Fund or lump-sum needs may be part of the calculation to provide for unexpected emergencies the family might encounter immediately after the death of the insured
• Subtracts any assets available to fund financial needs after death

Question 4

Income Objective

Question from test -

There are ______ methods available to determine the income objective after the death of the client for planning purposes.

Answer 4

To analyze the insurance needs in either approach, the producer must also take into consideration the income objective of the proposed insured. The producer can use two methods of income objectives to arrive at the amount of insurance needed to fill the human life value or needs analysis requirements:

• Capital Liquidation: Assumes both principal (capital) and interest are liquidated over the relevant time period to provide the required income for the dependents. When income is paid out under capital liquidation the account balance will decrease as each payment is distributed.
• Capital Retention/Conservation: Assumes the desired income will be generated by the interest only, thus retaining or conserving the principal