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
Statements 1, 3, and 4 are correct
Disability and Long-Term Care Insurance
InsuranceLife insurance needs will likely change over the client’s lifetime and again financial advisers can provide an objective sounding board.
Personal FinanceIt now costs nearly $300,000 to raise a child for 18 years. Are you sure you're up for it?
RetirementThe answer depends on your sources of income, how much debt you carry and whether you have dependents who rely on you financially.
Financial AdvisorA special needs child demands extra diligence in planning. Here's a guide to best practices.
Financial AdvisorWhen someone dies, it's natural for a surviving spouse to grieve. But with a little planning, fear of an unknown financial future can be avoided.
InsuranceUnless you have kids, it's easy to think you don't need life insurance Here are the reasons why you might– as well as which type and how much to get.
Financial AdvisorDeath 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.
Financial AdvisorSo-called traditional families represent less than 20% of U.S. households today. Here's how advisors can adjust.
Managing WealthWhy and how to use permanent life insurance to help provide for a family member with a disability or special needs
InsuranceHow to tell when it's time to get life insurance – or decide that you don't have to have it yet or no longer need it.