Needs Approach

What Does Needs Approach Mean?

The needs approach is a method used to determine the amount of life insurance required to cover an individual or family’s necessities.

This approach considers two key variables: the immediate financial obligations that must be met at the time of death and the future income needed to sustain the household without falling into poverty. It is the calculation that insurance agents typically run with clients who are sorting out who needs life insurance in their household and at what amount.

Insuranceopedia Explains Needs Approach

The needs approach calculates the amount of life insurance required by summing all current and potential expenses and then subtracting the total value of existing assets from that amount. The figure it produces is the face amount to buy, and checking that number against the average cost of life insurance at different ages and health ratings gives a rough idea of what the monthly premium will run.

This approach considers a wide range of expenses, including:

• Funeral costs
• Legal fees
• Estate taxes
• Business buyout costs
• Probate fees
• Medical deductibles
• Emergency funds
• Mortgage expenses or rent
• Debt and loan repayment
• College fees and tuition
• Childcare and school fees
• Maintenance costs

Once the total is set, the next decision is how to choose the right life insurance policy for that amount, since term coverage and permanent coverage price very differently at the same face value.