Needs Approach

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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.

BREAKING DOWN '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.

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