The needs approach for determining the amount of life insurance needed has a different goal than the earnings multiple approach. The goal of the needs approach is meeting the total needs of the household after the death of a breadwinner, both at the time of the death and in the future. To calculate the amount of necessary life insurance according to this approach, add up all of your funding needs to determine the total needs of your beneficiaries. Include immediate needs, debt elimination, transitional funds, dependency funds, spousal life income funds, spousal education funds, children’s education funds, and retirement income funds. Subtract current insurance coverage and other available assets from this total.

There is a four-step process for calculating the needs approach.

1. Adjust your salary downward. Decreasing your salary takes into account the fact that family expenses will decline with the loss of an adult family member (see Table 1).

2. Add up all funding needs. This inventory of funding needs is a very detailed description of the total needs of the family. The total needs of the beneficiaries include the following: immediate needs, such as needs for a funeral and other expenses; debt elimination needs, such as needs to pay off debts like credit cards and mortgages; transitional needs, which include helping the spouse gain needed skills for better employment if necessary; dependency needs, such as needs for taking care of and educating children and sending them on missions; spousal life income needs, such as needs to take care of the spouse so he or she does not have to work; and education and retirement needs, such as the need to take care of the surviving spouse in retirement.

3. Subtract current insurance coverage and other available assets. The result gives you the amount of additional coverage you will need.

4. Determine the income stream replacement that would be needed to meet the family needs, and then calculate the amount of money required to provide the needed annuity (see Figure 2). The difference between your total needs and your current coverage and available assets determines the amount of additional insurance coverage that will be necessary to meet the needs of dependents in the event that the breadwinner dies. While it is not necessarily desirable, some couples find it essential to have two breadwinners. In that case, couples should consider having life insurance for both spouses.

If your goal for having life insurance is income replacement, recognize that your income needs will change over time. Depending on your salary, the size of your family, your investment plan, and the growth of your investment assets, the amount of income that will need to be replaced will increase significantly as children are born and raised; however, this amount will decline as your children leave college. Therefore, instead of having a single product to meet all of your needs, it may be advantageous for you to utilize multiple products that will give you maximum protection at the most cost-effective rate. These products should take into account your goals, budget, and growth in investment assets (see Chart 4).

 Chart 4