How Much Life Insurance to Buy?

Question 1

Explain the Human Life Value Approach

Answer 1

Dr. Solomon S. Huebner, developed one of the first systems for determining how much life insurance is appropriate based on the economic value of a human life.

1. involves estimating net future earnings (after taxes and living expenses) each year to retirement and then discounting that sum to a present lump-sum value using a reasonable interest rate.
2. The biggest drawback to the human life value approach is that it does not consider a family’s actual needs.

The needs approach method, overcomes this one-size-fits-all formula of the human life value method.

Question 2

Describe the Needs Approach to determining how much insurance to buy.

List the 5 types of information collected in this needs based approach?

Answer 2

• The needs approach to determining how much life insurance to buy is based on a detailed review of a person’s specific situation.
• The needs approach examines personal and family income, liabilities, and assets to calculate the right amount of life insurance.
• It is the most common method used today.

Types of Information Gathered

1. current income
2. accumulated assets and liabilities
3. financial goals and objectives
4. current (and expected) expenses
5. risk profile

The goal of needs-based planning is to identify two basic insurance needs:

• the lump-sum amount needed to cover expenses at death
• the amount needed over time to provide survivors with a secure standard of living

Question 3

Determining Lump-Sum Needs at Death

What are the 3 unavoidable expenses at death that require a lump sum?

What are the 3 elective expenses that could require a lump sum at death?

Answer 3

A certain amount of money is needed at death to cover immediate expenses that must be addressed at once. A lump sum of cash may be needed to

• pay final medical and funeral expenses;
• pay estate taxes and other estate settlement costs; and
• pay off any debt the insured may have incurred.

Additionally, a person may want to make available lump-sum amounts to enable his or her dependents to

• create a fund for emergencies;
• redeem a mortgage; and
• fund a trust to provide dependent care and/or pay for children’s education.

Question 4

Determining Ongoing Income Needs

Answer 4

Ongoing income stream to maintain their standard of living to some degree.

Social Security survivors benefit payments will cover some of that income need for a limited period including…

• food
• clothing
• utilities
• transportation
• medical expenses
• taxes
• savings

A complete life insurance needs assessment will account for all the ongoing financial needs facing an insured’s dependents.