Life Insurance is used to guarantee financial protection to the family of the insured when the insured dies. Only the named beneficiary of the policy has the right to claim the benefits.
Basically, there are two types of methods (human life approach and needs approach) for calculating the average amount you need to meet the financial requirements after the death of the insured. In this article, we are going to discuss the needs approach meaning.
The needs approach is used to identify the total life insurance you must buy. The method includes a few crucial factors that must be considered when determining the amount of insurance you require. The needs approach involves a budget that includes the expenses of your funeral and the total cost you will incur for real-estate and asset disposition. The two major aspects of the needs approach are:
If you use the needs approach to calculate the appropriate life insurance amount for your family, it is important to take your outstanding loans and other debts into consideration. If your spouse marries someone after your death or your children get a job and move away, then the requirement for income replacement will be reduced. This insurance calculation method is completely different from the human-life approach.
Talk to our investment specialist
The latter focuses on the amount of insurance a family needs if the person they are dependent on (for financial needs) were to die right now. The main difference is the human-life approach calculates the insurance amount depending on the financial loss and expenses the dependents will incur when the person dies. In this approach, the personal details of the insured, as well as the people dependent on this person, are considered. For example, age, job, marital status, children, and annual income are a few crucial factors that will be considered when planning your insurance using the human-life approach.
The needs approach, on the other hand, focuses on calculating the life insurance amount based on the basic necessities of the family. As mentioned above, the approach calculates the expenses the family will bear at the death of the insured as well as the future income needed for the survival of the family. Mathematically, the needs approach is defined as the calculation of the accurate insurance amount by deducting the assets owned by the insured from the current and future expenses.
The common factors that must be taken into account with the needs approach are estate Taxes, cost of the funeral, mortgage payments and rental expenses, emergency funds, home maintenance and utility, medical expenses, children’s Tuition Fees, legal fees for assets dispositions, probate fees, loan, and interest payment, and so on. Both human life and needs methods can prove accurate. Consider your debts, expenses, and the future income requirements of your family when deciding the method for calculating the life insurance amount.