Question

discuss the two commonly used ways to determine a person's life insurance needs

Answer 1

The two commonly used ways to determine a person’s life insurance needs are:

1. Multiple of income approach – This method’s approach is to replace a person’s (who is the primary breadwinner of the family) income or salary for a predetermined number of years. In this method the person’s current income is multiplied by the number of years of financial support that the person wants to provide to the survivors.
2. Human life value approach – In this method the person’s age, gender, occupation, and current earnings as well as future earnings are considered. The first step is to determine the person’s earnings from the current time till a set point of time in future. From this all taxes and living expenses are deducted. Next an assumed rate of return (or the interest that you expect the money to earn) will be deducted. Lastly the cost of additional benefits which is provided through employment (like health care, etc.) will be added. This approach helps in replacing the income which is lost.