The Life Insurance Need Analysis

The animateness policy policy Need AnalysisUnder this, the insured someone pays the premium regularly to restitution company, once a policy is taken, and in lieu of this, the insurer promises to pay a fixed sum of m hotshoty at the time of the finale of insured or on the expiry of a downstairstake period of time, whichever is earlier. The payment for manner insurance is certain but the event for which insurance is taken is non very certain.A Beneficiary house be a Person, Business, Trust, or Estate.The Owner of the policy is the Person or Organization who pays the premiums and has ownership right hands The right to name the beneficiaryThe right to receive dividends and to surrender the policy for cashThe right to dislodge ownershipThe right to assign a policy as collateral for a loan. goal is certain, but when it occurs is notLife insurance is of utmost importance for either idiosyncratics, businesses, communities, society and general public at large. If offers protect ion against loss of income and compensates the titleholders of the policy. It has early(a) brain functions besides making cash payment on death of a smell insured.Life is unpredictable. As the head of the family, everyone wants a secured feel for their family members. The nightmargons just about your familys fiscal protection keep haunting you.You motif life story Insurance because typically the need for income continues for those who be fiscally dependent on you, but there is no guarantee of your ability to earn consistently and for the rest of your life.Life insurance flush toilet help you safeguard the financial inescapably of your family.To replace income the family would need to hold back their normal of animated after(prenominal) the death of a w period earner.Life insurance insures your life and reduces any hardship your family whitethorn hire to bear in the unfortunate event of your death.Insurance can admit an emergency cash reserve.It can provide capital t o pay last expenses and operating capital during a familys readjustment period.to pay off a mortgage loan and other personal and business debts or to create a rent fund.To create a fund for childrens education.To create a family emergency fund or a fund for a family member with special needs.Life insurance proceeds consec appreciate a financial lump sum that can be used to cover a familys current and long-term operating expenses.It facilitates savings for old age to enjoy secured and peaceful life as the earning capacity of a person is reduced after retirement.It encourages hoi polloi to save money by making them oblige to pay premium regularly when a life policy is taken.It helps to mobilize savings of the public to channelize it for investment and thus promote economic discipline of the country.It (policy) can be used as a security to raise loans and thus improves credit worthiness of an individual or a business.It too has taxation benefits as under Income Tax Act, premium p aid is relinquished as a deduction from the total income.Exhibit 1 Life ExpectancyGraph of life expectancies from birth and from age 65 from 1900 to 2003.In order to estimate the amount of life insurance that is required an agent must be able to founder judgment with the client which termss would be faced by the survivors resulting from the premature death of the proposed life insured, and how over a good deal it would hail to maintain the same or similar standard of living. A fact-finding interview with the client ordain begin by establishing qualitative goals. Once quality of life has been planned then this figure can be assigned to meet those objectives. These figures be called quantitative goals.Qualitative Goals Qualitative goals are quality of life goals. They reveal modus vivendi choices that give up a impart bearing on expenses, risk tolerance, and investment choices. For ex profound a family chooses to vacation each year in England of a month has made a qualit ative decision.Quantitative Goals Quantitative goals are the dollar figures assigned to qualitative goals. For example, the family who vacations in England for a month needs Rs.22,000 to pay for their holiday.What Is Life Need Analysis ?It is the substantial amount that would be take to maintain the surviving pendents for the period they remain dependants.By considering all off quite a littleting resources and benefits, the aggregate need for insurance can be trimmed to the unmet need for insurance the gap to be filled in order to satisfy the established goals. This net estimate whitethorn be used as the basis for a specific sales proposal. The nature of the unmet needs susceptibility also suggest the amounts and combination of types of insurance to recommend, such as a specified amount of whole life or other form of level coverage and a specified amount of decreasing term coverage.There are three basic manners for measuring life insurance needs The charitable Life Value f eeler andThe Needs processionThe Capital Retention ApproachEach approach is a tool to help set up the amount of life insurance needed by an individual or family. Life insurance provides protection from the permanent loss of income that arises from premature death. The approaches are based on the principle that a life has economic range. This repute is called capitalized take account of life. Capitalized value may be represent by the sum earn as salary by an income-earner who dies during the prime of his or her life. Capitalized value may also be represented by the loss of income-in-kind such as the cost of having to provide day-care, then costs of day-care or nanny services will be a cost for the survivor to pay.The objective of insurance is to replace the capitalized value of the life insured with a sum of money that when invested at the interest range in mental picture at the time of need analysis will provide an annual income stream equivalent to the annual lost earnin g power of the life insured.This can be expressed as Annual Income Need prevailing Interest Rate = Lump tote up insurance requiredCapitalization of income determines the amount of insurance needed to replace that lost income. Capital retention determines the amount of insurance needed to pay capital costs of survivors by providing a lump sum-the interest earned on the lump sum provides the income.For example if like a shots interest rate is 4%, the capitalized value of a life insured who earns Rs. 60,000 annually is Rs. 60,000 / 4% i.e. Rs. 15,00,000. This dream ups Rs.15 lacs would adopt to be invested at 4% so that Rs. 60,000 could be used annually for expenses that would have been paid by the income earner.For the Financial Dependency of SurvivorsThe three phases of financial dependance and the costs that survivors will face during these phases are Readjustment/ Last ExpensesDependency/ Ongoing ExpensesSurvivor Life Income Needs/ Future Expenses(all explained later in this chapter)It provides ample information to establish the most effective compresseds for that potential loss. Considerations can be personal, topographic flower or the liability. Needs Analysis can help determine the right amount of life insurance that is appropriate for your needs. It explains the overall principals behind estimating the costs associated with the death or disablement of an income earner and the provision of ongoing corroboration for any dependants and/or the insured. Also outlines the factors to consider in the planning the amount of cover for short term disablement or illness. Again it explains how the value of property assets should be estimated for insurance purposes and develops a comprehensive and integrated set of insurance policy options for the particular clients needs and circumstances. These other assets will help in determine the amount and kind of insurance necessary to meet the applicants current and approaching needs. When estimating the potential c ontribution of Social Security benefits to survivors income, you should be aware of something known as the blackout period. This is the period of time after the youngest child is 16 years old and before the surviving spouse becomes eligible for retirement benefits. During this period, no benefits will be paid by Social Security to a surviving spouse.Offsetting benefits may reduce or even eliminate some of the items in the needs list. If existing medical insurance has a large lifetime benefit, any uninsured exposure related to a last illness may be limited to the deductibles and coinsurance, if any. Existing life insurance may substantially reduce a deem of needs. Group life insurance will not provide a retirement income, but it will reduce the need for insurance by a working elicit working with minor children in the family. An inexpert mortgage may already be fully insured by a credit life policy. Social Security and other available benefits might cut the remaining need for retir ement income considerably.How much Life Insurance/ Determining the Need for Life Insurance (A General Concept)Well, the answer isnt really how much life insurance you need actually your life insurance needs often depend on a number of factors, including whether youre married, the size of your family, the nature of your financial obligations, your career stage and your goals. Its how much investment capital your family will need at the time of your death. This excellent question is to which there are as numerous answers as there are people to ask. Every advisor, financial columnist and relative has a formula that they consider the best. There are a number of approaches you can use to figure out how much insurance you should have.This section is designed to present the various need analysis orders used, as well as the pros and cons of each rule. As these issues deal with how to value a life, it is indeed a very complex proposition. The method that makes the most sense to you is pro bably the one that may work the best for you. No method is perfect, as you are trying to hit a moving target. Life brings many changes and your needs will change with them. The more assumptions you make, the more complex you will make your planning and the more chances there are that something will not work as planned. This does not mean that you should besides use simplest methods it is to give you a concept of why it is important to actively participate in all of your planning, fully understand it, and unendingly admonisher it. After all, it is your money. Remarkably, the simplest formulas can often be the best. Another thought to keep in mind is that as your other assets grow, such as retirement plans and investments, your need for life insurance will decrease.What determines your life insurance need ?Methods of calculating life insurance needInsurance mistakesWhat determines your life insurance need ?Life Stages and CircumstancesWhen determining your life insurance need, you should first consider your life stage and circumstances. Marital status, number of dependents, size and nature of financial obligations, your career stage, and your intentions to pass on your property are all factors to consider. Your need for life insurance changes as the circumstances of your life change.Starting verbotenIn the Starting Out stage of life, you may be just beginning your career or family. You may not have children or other dependents at this stage, but that doesnt mean you have no obligations. For instances, if you paid for your college education with student loans, you likely had a cosignatory for your loan-may be your parents or a grandparent. The same may be real of your car loan. If you were to die before the loan is paid, your cosigner would be obligated to pay the debt. Under law, a cosigner is responsible for full payment of a debt in the event of default. Death doesnt erase the debt obligation.single AdultA growing percentage of the population now falls into the single mature demographic group. This group covers a broad spectrum of ages, lifestyles, and obligations.Family Obligations-ParentsAlthough you may not have a spouse, your death could have a serious financial impact on other family members. If, like many adults, you are take holding your parents (either financially or with care), your death could have a major impact, both emotionally and financially. They would not only resort the support you have been providing to them, but they would also need to come up with the money for your final expenses.Family Obligations-ChildrenIf you are a single parent, the primary financial support for your children would die with you. If you are lucky, you may have family members who would step in and help your children if you died. If you are even luckier, they will be able to provide your children with the education and lifestyle you had hoped for them to have. Your need for life insurance as a single parent is even greater than that of a dual-parent, dual-income household, which would hitherto have one income if one parent died. Life insurance is a cost-effective way to make sure that your children are protected financially should anything take on to you.Debt ObligationsIn this stage of life, you may still be paying for or even still accumulated education loans. You may have purchased a house or condo with a cosigner. If you died, your cosigner would be legally liable for the payments on the debt.Protect Your InsurabilityAnother reason to buy life insurance at this stage of your life is to protect your upcoming insurability. Once you buy a permanent, cash value life insurance policy, it remains in effect for your entire life (assuming the premiums are paid), even if your health changes. If you were to experience a serious change in health, you might not be able to buy additional insurance coverage, but you would still have the permanent coverage you already own.Dual-Income Couple or FamilyIf you and your spouse both earn an income, it is possible that if one of you died, the other may be able to address financially on the remaining income. If there are mortgages, joint credit cards or other debt, or children in the picture, the loss of one income could be much more difficult to overcome. The more people who depend on your income while you are alive, the more life insurance you should own. If you died today with insufficient or no insurance, your mate could be forced to give up the residence or lifestyle for which you have both worked. When there are children involved, the loss of one breadwinner could mean a setback in the daily way of life, not to mention any plans for private school or college.Parent of Grown Children upright because your children have grown up and left the nest doesnt mean you have no need for life insurance. you may have spent your entire adult life building an solid ground of the realm that you intend to pass on to your children, grandchildren, or favorite charity. You can use life insurance to ensure that the bulk of your demesne passes to your heirs or designated charitable organization subject to certain tax advantages.Part of Overall Financial PlanningDetermining your life insurance needs should not be done in isolation. Instead, it should be looked at as part of your overall financial plan, with consideration given to your goals for savings and retirement, as well as tax and estate planning. As your life changes, your financial goals may change, as well as your need for life insurance, making it important to also sporadically review your coverage.Methods of Calculating Life Insurance NeedSeveral methods are used to calculate the appropriate level of insurance for you and your situation. While they all parting common features, some methods strive to be more simplistic, while others involve more sophisticated calculations. You may want to determine an amount on your own, utilize one of the simpler methods. This can provide a basis for your discussions with your financial planner.Insurable InterestBefore you begin calculating your insurance needs, it is important to determine insured interest. Basically, having an insurable interest in a persons life means that you would suffer emotional or financial harm or loss if that person were to die. It is everlastingly fictional that you have an insurable interest in your own life. However, to prove an insurable interest in someone elses life, you must have a kind to that person based on blood, marriage, or monetary interest. You must have an insurable interest before you can purchase an insurance policy.Family Needs ApproachThe family needs approach is one of the more comprehensive methods of calculating your life insurance needs. It assumes that the purpose of life insurance is to cover the needs of the surviving family members. This method takes into account the immediate and ongoing needs of the surviving family members, as well as income from other sources and the value of assets that could be used to help defray the familys expenses (such as bank accounts and real estate).Capital Retention ApproachThe capital retention approach is one of two calculation methods under the family needs approach. This approach assumes that life insurance principal will support the family indefinitely into the future. Because you will purchase more life insurance under this method, you will be in a better position if the surviving spouse lives longer than expected.Capital Liquidation ApproachThe capital liquidation approach is the second of two calculation methods under the family needs approach. This method does not provide as much continuing capital for the surviving spouse or for heirs after the death of the surviving spouse. However, it does allow you to spend less money by purchasing a lesser amount of life insurance coverage.Estate Preservation and Liquidity NeedsThe estate preservation and liquidity needs approach attempts to determine the amount of insu rance needed at death for items such as taxes, expenses, fees, and debts while preserving the value of the estate. This method considers all the variables of family lifestyle and the total cash needed to maintain the current value of the estate while providing adequate cash needed to cover estate expenses and taxes.Income Replacement ApproachThe income replacement calculation is based on the theory that the purpose of insurance is to replace the loss of your paycheck when you die. This analysis determines an economic or kind life value and factors in salary increases and the effects of inflation in determining the appropriate level of coverage. While more comprehensive than the rules of thumb, this method still works to consider special circumstances or financial needs and operates on the premise that the current level of income provides a satisfactory standard of living that will remain level throughout the future.Rules of ThumbThe rules of thumb are extremely basic calculations. They provide a starting point but fail to recognize special family circumstances or needs and focus only on the most basic components.One rule of thumb dictates that multiplying your salary by a certain number will provide an adequate level of insurance, while another calculates need based on normal living expenses.Insurance MistakesNo InsuranceThe worst mistake you could make concerning life insurance is having a need and not having any insurance at all. Very often, people can find all sorts of excuses for not buying life insurance. Its no fun to plan for your death, for one thing. For another, theres the tendency to think that dying wont happen to you, only to some person you read about in the obituaries. But how many times have you heard about a young, apparently healthy person dying suddenly in a car accident, leaving behind a spouse, a young child, and no insurance? Sadly, it happens, and when it does, the family faces not only emotional trauma but possibly an extremely diffic ult financial situation, as well.Not adequate InsuranceThe majority of people with insurance are underinsured. Insufficient coverage can occur as a result of buying what is affordable instead of what is needed. Failure to review your coverage periodically could also result in insufficient insurance, even if you started out with adequate levels. Inflation rates, your career, and your lifestyle may have changed. Your family could be faced with a large financial gap and left unable to maintain the current lifestyle if you died today. Consequences could include loss of the family home, scaling back of college plans, and possibly years of financial difficulty.Too some(prenominal) InsuranceIf you purchased a large policy during one point in your life and then didnt adjust your coverage when your insurance need was reduced, it is possible that you have too much life insurance. this is another good reason to periodically review your coverage with your financial planning professional. Peri odic reviews of your insurance coverage can reveal opportunities to change your levels of coverage to match your current and projected needs.Nowreview your coverageTrying to figure out how much life insurance is enough isnt always easy, and that amount will likely change with your changing circumstances. By examining your familys anticipated expenses during various periods after your death, you get a more virtual(prenominal) estimate of your life insurance needs. Unfortunately, many people underestimate their insurance needs and are under-insured. Often, the purchase of life insurance is based on cost instead of whats needed. By the same token, its possible to have more insurance than you need. You may have purchased a large policy during a particular point in your life, and then didnt adjust your coverage when your insurance need was reduced. Both of these circumstances are reasons to review your insurance coverage periodically with your financial professional. Doing so can reveal opportunities to change your levels of coverage to match your current and projected life insurance needs.Determining the Need for Life Insurance/ How Much is Enough? (A General Concept)HUMAN LIFE APPROACHThe present value of the familys share of the deceased breadwinners future earnings.The human life value concept deals with human capital. homosexual capital is persons income potential. The gay Life Value approach uses mathematical computation to determine how much life insurance is needed by valuing a human life. The benevolent Life Value approach considers the human being to be an income-producing machine. It is a device that mathematically converts your output into an amount of cash, your expected income until retirement. It determines the value today of cash that is flowing out in the future. This method focuses on an individuals future stream of income. It considers such things as annual salary and expenses, years remaining until retirement, and the future value of current rupees and translates this into an amount of insurance needed to replace the income stream in the event of premature death.What is your Human Life Value ?Beyond all doubt, your life is invaluable. Yet, there is a certain worth that can be attributed to the financial support you offer your parents, spouse or children. This worth is referred to as Human Life Value (HLV). In the future, if your family does not have the protective blanket of your presence, they will no longer be able to enjoy the benefits of the income you earned. Put simply, Human Life Value is the present value of your future earnings.Why should you calculate your Human Life Value ?You should calculate your Human Life Value so you can accordingly invest in insurance plans that provide your family with adequate finances and hence security even in your absence. The human life value concept goes beyond numbers and considers the entire impact caused by the loss of a human life and the value to a persons loved ones.How mu ch are your tomorrows worth?What is your Potential Earning Power (PEP)HLV of any person can be measured by capitalized value of that part of his income or income earning capacity devoted or meant for dependants arising out of economic forces incorporated within his being, like character, health education, training, experience and ambition. For better understanding let us see some illustrations.IllustrationMr. X - Age-40 yrs, Retirement age-60 yrs, Current salary-3,00,000 per annum (expected to remain same), Personal expenses-1,25,000, Net contribution to family-1,75,000 (300000 125000). Suppose he dies at the age of 40. Income lost by the family-175000 * 20 yrs (60 40) * discount rate for 20 yrs (Present value factor) 19,00,000.IllustrationMr. Y - Age-30 yrs, Age of spouse-27 yrs, Life expectancy of spouse-70 yrs, Age of child-3 yrs, Childs share of monthly household expenditure-10 %, Child will remain dependant till-22 yrs, Monthly household expenditure Rs. 40,000, Out of this, a mount spent on Mr. Y Rs. 10,000. Expected inflation in household expenditure 5 %, money to be set aside for childs education (in present value terms) Rs. 10,00,000. Money to be set aside for childs marriage/ other needs (in present value terms) Rs. 7,50,000. Outstanding loans Rs. 15,00,000. Other liabilities Rs. 5,00,000. Medical expenditure/ emergency fund Rs. 5,00,000. Rate of return on low risk securities/ deposits 8 %. Hence, HLV will be Rs. 1,66,45,475. If the rate of return on low risk securities/ deposits is 7 %, Revised HLV will be Rs 1,81,83,996.How do you determine your Human Life Value ?This approach is about determining how much insurance is needed and is based simply on how much income the proposed insured earns. All individuals who have financial dependants need life insurance. Factors to be taken into consideration while calculating HLV are age, current and future expenses and current and future income.The formula isAnnual Income / Interest Rate = Lump Sum (The Human Life Value).IllustrationIf the annual income of the primary wage-earner is Rs.30,000, the total amount of insurance needed would be (assuming a nominal rate of interest of 8% and a long-term inflation rate of 3%, the real rate of interest is 5%)Rs. 30,000 .05 = Rs.600,000 (human life value = amount of insurance required)If Rs.600,000 is invested at 5%, the return will be Rs.30,000 annually. Thus, the family of the insured has, in economic terms, would replace the income-earning value of the life lost through a policy with a Rs.600,000 death benefit.IllustrationAn insured makes Rs.42,000 a year and the current interest rate is 3.4%. She has a generous policy plus disability benefits that pay 70% of her salary. How much life insurance does she need based on capitalization of income?A. Rs. 1428B. Rs. 12352.94C. Rs. 1,42,800D. Rs.1,235,294.10There are different school of thoughts and approaches for purchasing and calculating the needs of life insurances, which aver as under One should purchase insurance worth 5 to 10 times the current annual income. This is an old thumb rule that does not take into consideration current assets and any special needs the customer or their family may have. Thus,When ones annual income is known, the insurance need is calculated simply as annual income multiplied by the number of years to service left.Ones yearly outgo towards Insurance premium should be 10% of ones annual Income. Thus,Life insurance need is, the financial need analysis approach. This is an approach which can take care of specific needs of an individual. Here, the basic objective is that the insurance coverage should be sufficient to provide for the dependants needs in case the breadwinner dies early.Steps for Calculating Human Life Value ApproachIn the human life value approach, the first step is to find the amount of annual income that is surplus to the individual. The surplus is the amount above what the insured would consume himself which provides the overall stan dard of living for the individual and the family. The surplus includes amounts spent on education for children, automobiles, vacations, clothing, and food for everyone in the family except him. The items to include in costs of self-maintenance are any money spent on his portion of housing, his clothing, food, the portion of his salary that goes for FICA, federal, state, and local taxes, and all other expenses to maintain the insured as a productive asset. The next part of the human life value approach involves plugging the given information into the mathematical model and calculating the answer. To determine the surplus, subtract the self-maintenance expenses from the average income.Exhibit 2 Steps for Calculating Human Life Value ApproachWeaknesses of the Human Life Value ApproachOther sources of income are ignored, (e.g., business earnings), it is calculated by using a constant income stream over the life of the insured since it is difficult to know what increase in income is pro bable.It ignores the number of years that income (mentioned above) will be required a person aged 25 and a person aged 65 would appear to require the same amount of coverage.In its simplest form, work earnings and expenses are assumed to be constant and employee benefits are ignored.The amount of money allocated to the family can quickly change because of divorce, birth of child, or death of a family member.The effects of inflation on earnings and expenses are ignored.Points to Ponder One, HLV is a moving target and to make it meaningful, you must review it once a year. Rather than chasing the revised HLV year after year, the aim should be to get the broad trend right with the expectation that in the long-term, the actual and estimate will converge.Two, do not get overawe by the HLV numbers thrown up. The number is just a starting point and must be put into the context of your present ability to set aside money.Three, remain disciplined in the sense that at any point in time you sho uld have planned in such a manner that in your absence, your family will not need to compromise on their yet-to-be fulfilled needs.NEEDS APPROACHIt is a method of calculating how much life insurance is required by an individual/ family to meet their needs (expenses) if the family head dies.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. This approach contrasts the human-life approach.The needs approach is a function of two variablesHow much will be needed at death to meet obligations ?How much future income is needed to sustain the household ?When calculating your expenses, it is best to overestimate your needs a little. By doing this you will be buying and paying for a little more insurance than you need, but if you underestimate, you wont rea