A life insurance policy is not a contract of indemnity but is a valued
policy that pays a named beneficiary a stated sum upon the death of
the insured. The event insured is “an uncertain time of death.”Death is premature if it occurs during an individual’s economic productive period. In such cases there often are unfulfilled and
unexpected financial commitments that must be met. These
expenses would fall upon the survivors if proper financial planning
were not in place.
Premature death creates at least four costs that may have to be
met by the survivors. First, there is the termination of the worker’s
income and the family’s share of that income. Second, there can be
terminal expenses incurred that must be met such as medical bills
and funeral expenses. There may also be a potential cost to society
if the lack of income would force dependents into a welfare program.
Finally, there are noneconomic costs such as the emotional loss of
the guidance and counsel of the deceased.
can be used to provide the funds to meet such
economic needs. However, the dollar amount of life insurance
necessary depends upon individual circumstances and the stage of
life at which death might occur. Because of this a life insurance
program should be subject to frequent review.
A life insurance program can be justified to help offset these costs
because of the lost earning capacity of the deceased which was the
primary financial support of these dependents.
Determining the Amount of Life Insurance.
The amount of life insurance an individual can purchase depends
on his or her ability to pay the premiums and the agreement of an
insurance company to provide the coverage.
It is not easy to determine the amount of life insurance that would
be beneficial in the event of the premature death of an individual who
financially supports a family or wishes to bequest something to
Individuals and families have different needs and desires to fulfill
in such circumstances. One method used to help determine the
amount of life insurance to have is called the “needs approach.” Theexpected financial needs of the survivors are estimated. Social
Security survivor benefits, current life insurance and other current
and anticipated assets are also estimated. The aggregate amount of
expected assets is then subtracted from the anticipated financial
needs of the survivors to determine the additional amount of life
insurance required to cover all of these projected needs.
Basic family needs include the following:
1) Estate settlement fund — Final expenses, taxes, legal fees.
2) Income for the readjustment period — Adapting to the forced lifestyle,
3) Income for the dependency period — Until the last child reaches 18 years of age
4)Income for the “blackout period” — Period of time between being a
survivor with children to being a survivor at age 60,
5) Special needs — Emergency Fund, Mortgage Payoff, Educational Needs and
6) Retirement fund — For the surviving spouse.
When estimating the amount of life insurance needed,
consideration must be given to both future inflation and expected
interest rates. The “needs approach” requires frequent review as the
various factors can change rapidly over time as children grow, new
jobs are taken, housing requirements change, educations are
completed and other life style situations occur.