Question

What is the “Multiples of Income” method when calculating life insurance needs? What is the “Needs Analysis” method for calculating the amount of life insurance required for an individual? What do you like more and why?

Answer 1

"" Multiples of income Method ""

'' The multiple of income method '' is an easy calculation based on the simple principle that immediate and future needs will equal about 10 times your current annual income.

Example for easy to understand - if you make $20,000 a year, you will need a life insurance policy that pays around $200,000.

"" Need analysis method ""

In this another method, the calculation is done on the basis of day-to-day family expenses till the life expectancy of the youngest member in the family. some major factors to consider for assessment are:- Number of dependents and their needs , loans ,Children education , Children marriage , Provision for non working spouse , kind of lifestyle you want to provide your family , any other special  need..etc  

Once you sum up all the above expenses, the figure you arrive at is what the family needs today, considering that you will die today. Then deduct the life insurance policy you already had and all your assets. This new figure is the gap that you need to bridge. Note that invested assets do not include residence and car. The needs analysis scores over Human Life Value as the former considers financial needs that may arise at different life stages. However, the Human life Value assumes that people are going to earn the same income throughout the tenure, thereby not giving a complete picture. Additionally, you can use the needs’ analysis to assess your retirement needs.

What do you like more and why ?

Needs Analysis method combined with the concept of Human Life Value will be ideal for any working individual.After determining the required insurance cover,it can be related as a multiple of earnings in the case of an individual.The general principle of multiple of earnings(Income) is only a rough thumb rule & it may vary among individuals depending on the stage of economic life cycles in which individuals are placed.