Chapter 5 - Calculating Life Insurance Needs

Question 1

Define Life Insurance Programming (2 things).

Answer 1

Evaluates a person’s need for capital resources upon death.
Involves assessing current financial position, forecasting future obligations, and determining the necessary life insurance amount.

Question 2

Once a method of Life Insurance Programming is chosen, the financial planners must consider…

Answer 2

all family members, especially both spouses.
Even non-employed spouses provide essential services that have financial value (e.g., child care).

Question 3

Describe the Capital Retention Method (2 things).

Answer 3

Determines life insurance needed by using interest only to support the family.
Principal remains intact for heirs after the income period.

Examples:
Calculate needed income: Annual income minus Social Security benefit.
Divide needed income by interest rate to determine required principal.
Add one year’s income to principal for total death benefit.

Question 4

Describe the Human Life Value Method. (3 things)

Answer 4

Principle:

• Purpose of life insurance is to replace an individual’s economic value.

Calculation:

• Considers income through work-life expectancy, including raises.
• Apply discount rate to total income to determine present value of life.

Question 5

Define the Financial Needs Analysis Method.

Answer 5

Also known as insurance needs method.
Examines recurring expenses to survivors and any unusual expenditures due to death.

Question 6

The Financial Needs Analysis Method factors in 4 factors. List them.

Answer 6

Marital status,
employment roles of spouses,
family size,
dependents’ willingness and ability to work.

Question 7

What is the Lifestyle Impact for the Financial Needs Analysis Method (4 things)?

Answer 7

Single with no dependents: Minimal need for life insurance (debt repayment and death expenses).
Single parent or single with dependents: Need life insurance to continue income for dependents.
Childless couples: Generally need enough to cover debts and final expenses.
Families with children or dependents: Increased need to maintain living standard.

• Emphasis on insuring income-producing parent.
• Consider value of non-income-producing parent’s services.

Question 8

What is the Family Needs Classification for the Financial Needs Analysis Method (6 things)?

Answer 8

Final Expenses: Last medical costs and funeral expenses.
Readjustment Period: Nonrecurring costs immediately following death (typically two years).
Dependency Period Income Fund: Income for dependents during highest need period.
Mortgage Payment Fund: Pays off mortgage and debts to reduce income needs.
Education Fund: Lump sum for education expenses.
Life Income for Surviving Spouse: Income for spouse, especially during Social Security blackout period and retirement.

Question 9

Regarding Inflation and Discounting for the Financial Needs Analysis Method, needs are ____ by CPI, and then ____ using risk-free rate or expected earnings rate.

Answer 9

inflated
discounted back to present

Question 10

Describe the 2 calculation methods for the Financial Needs Analysis Method.

Answer 10

Annuity Method:

• Meets dependents’ needs through life expectancy period.
• Both death benefit and interest are consumed.

Purchasing Power Preservation Model:

• Provides for annuity income and capital preservation.
• Only part of the interest is consumed; rest preserves purchasing power of death benefit.