Needs Approach

AAA

DEFINITION of 'Needs Approach'

A method of calculating how much life insurance is required by an individual/family to cover their needs (i.e. expenses). These include things like funeral expenses, legal fees, estate and gift taxes, business buyout costs, probate fees, medical deductibles, emergency funds, mortgage expenses, rent, debt and loans, college, child care, private schooling and maintenance costs. The needs approach contrasts the human-life approach.

INVESTOPEDIA EXPLAINS 'Needs Approach'

The needs approach is really a function of two variables:

1. How much will be needed at death to meet obligations.
2. How much future income is needed to sustain the household.

When calculating your expenses, it is best to overestimate your needs a little. Yes, you'll be buying and paying for a little more insurance than you need, but if you underestimate, you won't realize your mistake until it's too late.
RELATED TERMS
  1. Estate Planning

    The collection of preparation tasks that serve to manage an individual's ...
  2. Estate Tax

    A tax levied on an heir's inherited portion of an estate if the ...
  3. Life Insurance

    A protection against the loss of income that would result if ...
  4. Whole Life Insurance Policy

    A life insurance contract with level premiums that has both an ...
  5. Term Life Insurance

    A policy with a set duration limit on the coverage period. Once ...
  6. Permanent Life Insurance

    An umbrella term for life insurance plans that do not expire ...
RELATED FAQS
  1. What is the difference between term and universal life insurance?

    Term life insurance is the most basic of insurance policies. It is nothing more than an insurance policy that provides protection ... Read Full Answer >>
  2. What is the purpose of the Herfindahl-Hirschman Index?

    The Herfindahl-Hirschman Index (HHI) evaluates the concentration of a firm in a market. It is used by the government to ... Read Full Answer >>
  3. What is the difference between moral hazard and adverse selection?

    Adverse selection occurs when there's a lack of symmetric information prior to a deal between a buyer and a seller, whereas ... Read Full Answer >>
  4. What impact does disposable income have on the stock market?

    In theory, the impact that disposable income has on the stock market is that a widespread increase in disposable income leads ... Read Full Answer >>
  5. What does the lapse ratio in the insurance sector measure?

    The lapse ratio measures the amount of insurance policy renewals with respect to the total number of insurance policies at ... Read Full Answer >>
  6. How does the performance of the stock market affect individual businesses?

    The stock market affects individual businesses by influencing consumer spending and providing the chance for stronger returns ... Read Full Answer >>
Related Articles
  1. Home & Auto

    Taking The Surprise Out Of Long-Term Care

    Don't be caught unprepared - find out what to look for in LTC insurance policies.
  2. Home & Auto

    Long-Term Care Insurance: Who Needs It?

    No one is immune to the possibility of one day needing long-term care - and the costs can deplete a life savings.
  3. Insurance

    Life Insurance: Putting A Price On Peace Of Mind

    Would your death leave loved ones financially stranded? Find out how to ease your mind and keep them protected.
  4. Professionals

    How to Fund Retirement with Insurance

    So you've contributed the max to all available retirement vehicles...now what? Consider a permanent life insurance policy (and its fee structure).
  5. Investing Basics

    What is Cyclical Stock?

    A cyclical stock is an equity security whose price is affected by ups and downs in the overall economy.
  6. Stock Analysis

    How Altria Lights Up Portfolios

    A look at how the highly profitable brands of tobacco giant Altria just won't quit.
  7. Retirement

    IUL Insurance: An Alternative Retirement Plan?

    Indexed universal life insurance is the rise. But critics argue that wisely allocated IRA and 401(k) funds will normally offer better returns.
  8. Economics

    What is a Fiduciary?

    A fiduciary is a person who acts on behalf of another person (or people) to manage assets.
  9. Economics

    What are Consumer Goods?

    Products that are purchased for consumption by the average consumer. Clothing, food, automobiles and jewelry are all examples of consumer goods
  10. Mutual Funds & ETFs

    This ETF Can Weather Any Market Condition

    Looking for a winning ETF that's capable of performing in almost any environment?

You May Also Like

Hot Definitions
  1. Fisher Effect

    An economic theory proposed by economist Irving Fisher that describes the relationship between inflation and both real and ...
  2. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  3. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  4. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  5. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  6. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
Trading Center