The life insurance needs approach - how does it work?


The needs approach is one of the most accurate methods to determine the amount of life insurance to own. It takes into account all the present and future family needs and calculates directly the amount necessary to meet those needs.

To estimate how much life insurance you need using the needs approach, you should add up all current and potential expenses and then subtract the total amount of existing assets from it.

Cash Needs

These are the immediate lump sum cash needs at death, including administrative and burial expenses, tax liabilities, uninsured medical bills, estate settlement costs and debt liquidation.

Multi-Period Income Needs

The monthly income that the breadwinner's spouse and dependents will need after that person's death.

  • Readjustment period income needs - a period of one or two years following the insured's death in which the family should receive the same income as when the breadwinner was alive. The readjustment period income provides a cushion period for the spouse to adapt to their new situation.
  • Children's income needs during their dependency period - when the insured's children are under 18 at the time of that person's death, the family should receive income during the dependency period, i.e. the period between the breadwinner's death until the children reach age 18. The income needed may vary from family to family depending on whether the spouse is on the labor force or plans to remain at home to look after the children.
  • The surviving spouse's income needs - for a spouse who is under age 60, who has been unemployed for years and whose youngest child has reached 16, the need for income in the case of the family head's death is particularly urgent. This is especially true if the insured dies during the blackout period (the period from the time Social Security survivor benefits terminate to the time they are resumed).
  • The spouse's retirement needs - the need for the surviving spouse's adequate retirement should be considered.

Special needs

Any additional family needs that are not covered by any of the above categories. Different funds can be established to cater for these needs, including an education fund, an emergency fund, a mortgage-repayment policy, and other major-debt-repayment policies (for cars or other non-mortgage long-term debt).

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