Overview
Main Menu Name: Insure
Calculates the surplus or deficit in a family's financial security following the death of a "breadwinner." This insurance needs analysis translates income needs to capital needs, combines them with current cash needs to arrive at total capital needs, and then, after considering capital assets, calculates the shortfall, if any, to be insured.
In this article:
Background
There is no perfect answer to the question of "How much life insurance do you need?" Ultimately, the answer must be, "I don't need any life insurance - but those I love do." So how much do they need? There are two basic approaches, the "human life value" approach and the "capital needs" approach.
The human life value approach evaluates the economic worth of a person to those who are dependent on his or her ability to generate income. Essentially, it assumes death occurs today and measures the economic loss that would have been generated had the individual lived to the end of his or her working lifetime.
The needs approach (some call it the programming approach) analyzes various expenses that must be met if the income provider dies. These needs will vary depending on the composition of the surviving family, their current living standard, and the standard to which they are assumed to adjust.
Capital to pay lump-sum outlays such as illness expenses, burial costs, and estate administration expenses is essential.
Re-adjustment or transition income that serves as an economic shock absorber allows families to adjust to the death of the breadwinner. Although not essential in absolute terms, this extra income/capital can be of tremendous psychological comfort.
Income for the family while the children are dependent (often called the "dependency period") is another essential.
Special needs for capital or income must be considered. These "special needs" include cash to pay off a mortgage (good to have even if you don't actually use it for this purpose), an "emergency fund," educational needs, or other special needs such as a handicapped parent or retarded child.
After needs are identified and translated into terms of income and/or capital, it is important to determine sources and amounts of currently available cash. The difference between what is now available and what is needed represents the additional life insurance that should be purchased.
It is important to note that there are weaknesses in both the human life value and the needs approach to the problem. But these flaws are minor. No survivor ever complained that the insured had too much life insurance! Survivors must be protected before they are survivors, or they must learn to live with less or live without.
Consider printing out a number of different assumptions and constructing a "survival level-flourish level" spectrum of insurance needs. Then choose the one that is most affordable from a premium payment viewpoint and from the position of the potential survivors.
Why should I use this calculator?
- To plan for the financial security of survivors.
- To identify liquidity needs such as final expenses, emergency funds, and mortgage payoffs (if the mortgage is not to be paid off, continuing payments should be reflected in the "Capital Needs" category).
- To compare total needs with total resources to indicate the need for more life insurance, more accumulation of additional assets, or to let survivors manage on less income and capital.
Getting Started
There is no perfect answer to the question of "How much life insurance do you need?" Ultimately, the answer must be, "I don't need any life insurance but those I love do." So how much do they need? There are two basic approaches, the "human life value" approach and the "capital needs" approach.
The human life value approach evaluates the economic worth of a person to those who are dependent on his or her ability to generate income. Essentially, it assumes death occurs today and measures the economic loss that would have been generated had the individual lived to the end of his or her working lifetime.
The needs approach (some call it the programming approach) analyzes various expenses that must be met if the income provider dies. These needs will vary depending on the composition of the surviving family, their current living standard, and the standard to which they are assumed to adjust.
Capital to pay lump-sum outlays such as illness expenses, burial costs, and estate administration expenses is essential.
Readjustment or transition income that serves as an economic shock absorber allows families to adjust to the death of the breadwinner. Although not essential in absolute terms, this extra income/capital can be of tremendous psychological comfort.
Income for the family while the children are dependent (often called the "dependency period")is another essential.
Special needs for capital or income must be considered. These "special needs" include cash to pay off a mortgage (good to have even if you don't actually use it for this purpose),an "emergency fund," educational needs, or other special needs such as a handicapped parent or retarded child.
After needs are identified and translated into terms of income and/or capital, it is important to determine sources and amounts of currently available cash. The difference between what is now available and what is needed represents the additional life insurance that should be purchased.
It is important to note that there are weaknesses in both the human life value and the needs approach to the problem. But these flaws are minor. No survivor ever complained that the insured had too much life insurance! Survivors must be protected before they are survivors, or they must learn to live with less or live without.
Consider printing out a number of different assumptions and constructing a "survival level-flourish level" spectrum of insurance needs. Then choose the one that is most affordable from a premium payment viewpoint and from the position of the potential survivors.
Entering Data
- Name: Enter the name of the insured.
- Current Cash Needs: Enter the cash needs upon death that will require immediate payment.
- Capital Needs: Enter the needs for capital funds to produce adequate long-term streams of income.
- Capital Assets: Enter the currently owned capital assets that can be used to produce income.
Results
The program calculates the total cash needs, the total capital needs, the total of currently owned capital assets, and any surplus or deficit.
Comments
0 comments
Please sign in to leave a comment.