What Is the Needs Approach?
Let me explain the needs approach to you—it's a straightforward method for figuring out how much life insurance you should buy. You base it on creating a budget for all the expenses that come up after someone dies, like funeral costs, settling the estate, and replacing some of the income to keep the spouse or kids going.
Key Takeaways
You use the needs approach to estimate exactly how much life insurance coverage you need. It accounts for money required for burial and other debts, such as your mortgage or kids' college costs. This method differs from the human-life approach, which dives deeper into your potential future earnings or overall economic value.
Understanding the Needs Approach
The needs approach boils down to two main variables: the money you'll need right at death for immediate bills, and the ongoing income to keep the household running. When you're calculating this, I recommend overestimating a bit to be safe. For example, factor in any debts like your mortgage or car payments. Also, remember that the need for income replacement might decrease over time as kids move out or a spouse remarries.
This contrasts directly with the human-life approach, which figures out life insurance based on the financial hit your family would take if you died today. That one looks at things like your age, gender, retirement plans, job, salary, benefits, and details about your spouse and dependents.
Types of Life Insurance
Life insurance gives financial security to your surviving dependents if you pass away. It's a contract where the insurer promises to pay a death benefit to your beneficiaries. You have options like the needs approach or human-life approach for planning, and actual policy types include whole life, term life, universal life, and variable universal life (VUL).
Whole life, also called traditional or permanent life, covers you for your entire life. Beyond the death benefit, it builds cash value through a savings component. Term life pays out only during a set period—if the term ends, you can renew, convert to permanent, or just let it lapse.
Universal life resembles whole life but adds an investment savings feature with premiums as low as term life. Most let you adjust premiums, though some need a lump sum or fixed schedule. Variable universal life is permanent with savings you can invest, and like universal, the premiums are flexible.
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