Posted in Finance, Accounting and Economics Terms, Total Reads: 386
Definition: Needs Approach
Needs approach is a method of calculating the life insurance required by an individual or a family to cover all their needs & expenses. It includes the things like legal fees, funeral expenses, business buyout costs, gift & estate taxes, medical deductibles, probate fees, mortgage expenses, emergency funds, debts & loans, rent, child care, college fees, maintenance costs as well as the private schooling. This approach contrasts the human life approach.
Under this method, you should divide the needs of your family into two categories:
• Immediate needs at death (cash needs) - How much money will be needed at the time of the death to meet the obligations?
• Ongoing family needs (net income needs) - How much income in the future is needed to sustain the house-hold?
When calculating the expenses, it is always better to overestimate the needs a little. In this case, one will be buying & paying for a little more insurance than he needs. But if someone underestimates the expenses, he will not realize his mistake until it's too late.
It is also called as the family needs approach or total needs approach or the needs analysis. It assumes that the goal of a life insurance is to cover immediate expenses of the surviving family members after the death of the insured family member as well as to cover their ongoing expenses in the future. In contrast to the income replacement approach, this approach focuses more on the financial needs of the surviving family members than the expected earnings of the insured person. It involves of determining the amount necessary to allow one’s family members to meet its various expenses in the event that the insured family member should die.