Finding a right life insurance cover involves a process where one needs to calculate the actual financial needs of their own as well as family members when time demands.
Need analysis takes into consideration the actual needs of the dependents and self
Finding a right life insurance cover involves a process where one needs to calculate the actual financial needs of their own as well as family members when time demands.
There are broadly two ways to calculate how much insurance one requires ---Human Life Value (HLV) and Need Based Analysis. The needs analysis is also called the family needs approach, the total needs approach, or the needs approach.
It is based on the assumption that the goal of life insurance is to cover the surviving family members’ immediate expenses post the insured family member’s death, along with their ongoing expenses into the future. It aims at the income and cash needs that must be met following an individual’s premature demise and compares those needs to resources already available.
This approach classifies the needs and decides their priorities. Individual and family needs to be assessed, along with the current and estimated ones. Need based approach estimates minimum economic support through life insured, whereas the HLV approach suggests maximum insurance. Need analysis takes into consideration the actual needs of the dependents and self, whereas HLV approach takes only cumulative earnings of the insured through his entire life.
Under this method, the family’s needs are divided into three main categories:
Case needs: |
Immediate needs at death.
Net income needs:
Ongoing or monthly family needs.
Special needs:
Lump-sum needs occasioned by certain specific events like child’s higher education, marriage or travelling.
Need base approach works on two principles: How much will be needed at death to meet obligation? And how much future income is needed to sustain the household? Let us assume Naman has to understand the amount of insurance he will need to take care of his family consisting of his wife and a 3-year-old daughter. If he follows the need analysis approach, he is required to first estimate his family’s immediate needs for the remainder of his life as follows:
(a) |
Family medical expenses: Rs 6 lakh; loans including credit cards outstanding balance: Rs 55 lakh; emergency fund: Rs 12 lakh. Total: Rs 73 lakh.
(b)
Further, he has to calculate his current and future needs and expenses of his family that include - needs and education expenses for his daughter for 20 years: Rs 25 lakh; his wife’s needs for the next 30 years if she is non-earning: Rs 1 crore. Total: Rs 1.25 crore.
(c)
By adding both the sub totals the sum is Rs 1.98 crore, this is the amount that his family would need in case of his death. =(a) + (b)
(d)
Also, he has to estimate the total assets available with him i.e his assets are bank deposits: Rs 7 lakh; investments in stocks, mutual funds and FD’s, retirement savings: Rs 4 lakh; PPF: Rs 10 lakh; existing insurance cover: Rs 6 lakh. Subtotal: Rs 27 lakh.
(e)
This means his actual life insurance need is the difference between his family needs i.e. Rs 1.98 crore and his existing assets is Rs 27 lakh i.e. Rs 1.71 crore. =(c) – (d)