The needs approach is a strategy used in finance and estate planning to determine the amount of life insurance needed to maintain an equitable standard of living, manage end-of-life expenses, and pay off debts. It differs from the human life approach, which focuses on maintaining the status quo. The needs approach considers various expenses, including end-of-life expenses, outstanding debts, and living allowances. It provides long-term financial stability and helps survivors adjust to the insured’s loss.
In matters of finance and estate planning, the needs approach is a strategy used to determine how much life insurance is necessary to enable an individual or family to meet their needs. The idea is to identify the amount of life insurance required to help family members maintain an equitable standard of living in the event of the insured’s death, while managing end-of-life expenses and any outstanding debts that may exist. . The scope of expenses considered under this approach will vary, depending on the circumstances of the individual or family unit.
The needs approach to estate planning has a different approach than the other more common strategy known as the human life approach. This strategy focuses more on the amount of life insurance that would be required to offset the financial loss should the insured party die. The goal here is to determine the amount of insurance required to maintain the status quo, as if the policyholder were still alive and generating an income. Calculating the amount of insurance often involves considering the age and general health of the insured, the annual salary and benefits that come with employment, and the type of pension or retirement plan the policyholder has. While this approach addresses many of the same expenses as the needs approach, many do not consider it all-encompassing.
There are many different types of expenses that can be included when using the needs approach. End-of-life expenses, such as funeral costs, state or gift taxes that are imposed, legal fees to probate, expenses incurred by estate administrators, and end-of-life medical costs are just a few examples. In addition, things like outstanding mortgage balances, other loans, credit card debt, child care and education expenses for minor children, and general living allowances are also part of the formula.
One of the benefits of the needs approach is that it tends to address long-term needs, as well as immediate expenses that arise after the death of a loved one. By making sure there is enough coverage to handle medical, funeral and other expenses that need to be taken care of quickly, survivors of the deceased don’t have to worry about money as they grieve. At the same time, life insurance coverage provisions created using the needs approach also help ensure that loved ones continue to enjoy long-term financial stability. When properly calculated, the coverage will also provide additional time for everyone involved to adjust to the insured’s loss and get back to the business of life.
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