The other alternative is the needs approach, which is more widely used. First, analyze the family's needs and objectives in case a breadwinner dies or becomes disabled. A need is any one of the following:

1. Last expense fund - including medical and funeral expenses.
2. Readjustment fund - non-recurring expenses incurred while the family adjusts to the loss of income.
3. Dependency period income - children and dependents required income for current living expenses and routine maintenance throughout the household.
4. Mortgage payment fund - The ability to payoff the mortgage should a breadwinner decease.
5. Educational fund - Providing for a child's education in the form of a lump sum can lessen the burden during financial hardship.
6. Life income for the surviving spouse - In the case of one non-working spouse, this alleviates having to produce sufficient income for a given time period.

The needs approach is not limited to fulfilling objectives in the event of death only. It also considers a family's living needs, such as providing retirement funds and planning a child's education.

Practice Question: When utilizing the needs approach in the determination of life insurance, which of the following factor(s) should be considered?

1. The family expenses that will remain after the wage earner dies.
2. The value of the life that is lost in the event the wage earner dies.
3. The income that is generated by the wage earner.
4. The number of dependents.

A. 1 only
B. 3 only
C. 1, 2, and 3
D. 1, 3, and 4
E. 1, 2, 3, and 4

Answer: D
Statements 1, 3, and 4 are correct

Disability and Long-Term Care Insurance

Related Articles
  1. Insurance

    Thinking About Life Insurance as Income Protection

    U.S. households rank owning adequate life insurance toward the bottom of the list of nine common financial goals. Here's why that thinking is flawed.
  2. Insurance

    6 Steps to Determine Your Life Insurance Needs

    Use these basic calculations for an estimate of how much life insurance you should get.
  3. Insurance

    Life Insurance Should Cover Emotional Needs Too

    Life insurance should cover the financial and emotional needs of family members.
  4. Financial Advisor

    How Life Insurance Can Help With Liquidity

    Life insurance can provide liquidity in personal and business situations when access to capital is essential. Learn how to utilize its unique properties.
  5. Retirement

    The Smart Way to Use Life Insurance for Retirement

    Here's how to incorporate life insurance into a plan to ensure that you and your family have the smoothest possible transition into retirement.
  6. Insurance

    Figure out Your Life Insurance Needs With This Formula

    It often seems like the people that don't buy life insurance are the ones who actually need it most.
  7. Personal Finance

    Kids Or Cash: The Modern Marriage Dilemma

    It now costs nearly $300,000 to raise a child for 18 years. Are you sure you're up for it?
  8. Financial Advisor

    Estate Plans Should Include Instruction Manuals

    Death is not something that we wish to dwell on, but estate planning—and figuring out even more basic issues—is something we definitely should not avoid.
  9. Insurance

    Sizing Up Your Life Insurance Needs

    There isn’t a one-size-fits-all answer for how much life insurance one needs.
Frequently Asked Questions
  1. When are Beneficiaries of a Will Notified?

    Learn when the beneficiaries of a will must be notified, and understand how this requirement varies depending on whether ...
  2. Why Does Larry Page Pay Himself a $1 Salary?

    Google co-founder Larry Page continues to take an annual salary of only $1 as chief executive officer.
  3. What is Common Stock and Preferred Stock?

    Learn about the differences between common and preferred shares. Explore situations where preferred shares have more favorable ...
  4. Can CareCredit be Used for Family Members?

    Learn more about the available options that CareCredit offers to pay for out-of-pocket medical procedures with little to ...
Trading Center