Financial Intel Monthly

Life Insurance Needs: Family Needs Approach

Nov 25, 2020 12:31:00 PM / by The Retirement Group (800) 900-5867

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What Is The Family Needs Approach?

The family needs approach--also called the needs approach, the total needs approach, or needs analysis--is a method of determining the amount of life insurance you should carry. It assumes that the goal of life insurance is to cover the surviving family members' immediate expenses after the insured family member's death as well as their ongoing expenses into the future. In contrast to the income replacement approach, it focuses on the financial needs of surviving family members rather than the expected earnings of the insured. It involves determining the dollar amount necessary to allow your family to meet its various expenses in the event that the insured family member should die. Under this method, you divide your family's needs into two main categories:

  • Immediate needs at death (cash needs)
  • Ongoing family needs (net income needs)

Immediate Needs At Death

The immediate needs at death require cash available to cover most or all of the following types of costs:

  • Final medical treatment costs
  • Funeral and burial costs
  • Estate settlement costs (e.g., probate costs, attorney's fees, estate taxes, inheritance taxes)
  • Costs of settling credit card and other debts
  • Emergency fund for unexpected costs
  • Establishment of college education expenses fund

Technical Note: The debts category includes obligations such as credit card debt and auto loans. It may also include obligations to repay student loans. Some planners, moreover, would include long-term obligations (such as a mortgage) rather than including mortgage payments as part of ongoing family needs.

Ongoing Family Needs (Net Income Needs)

The ongoing family needs (e.g., food, clothing, shelter, and transportation) require continuing income to meet family expenses associated with different periods lasting until the surviving spouse's death. These periods include the following:

  • Readjustment period immediately after the insured's death
  • Child dependency period
  • Blackout period (surviving spouse income needs after the child dependency period and up to retirement)
  • Surviving spouse retirement period

The amount of income that needs to come from life insurance (i.e., the net income) equals the dollar value of these needs minus the dollar amount of other expected sources of income, such as:

  • Social Security survivor benefits
  • Spouse's wages
  • Employee pension plans

This amount is discounted back to present value to come up with a lump sum that would produce that income.

Subtract Available Assets

After adding up these immediate and net income needs, you then subtract from this total the family's other available assets that could defray some or all of the family needs. These assets include the following:

  • Bank accounts (checking accounts, savings accounts, and certificates of deposit, among others)
  • Savings bonds
  • Real estate
  • IRAs, 401(k)s, pension, profit-sharing plans, etc.
  • Group life insurance through an employer or association membership
  • Existing personal life insurance policies
  • Investment assets (e.g., mutual funds, stocks, bonds)
  • Stamp collections, coin collections, antiques, artworks, or other valuable possessions, if appropriate to consider in your situation

The difference represents your family's needs that life insurance proceeds--and the future investment of the proceeds--must cover.

The General Equation

The general equation for the family needs approach looks like this:

Immediate needs at death + Present value of ongoing family needs - Expected available assets = Life insurance to meet family needs The following simplified example illustrates this equation:

Example(s): Mort and his wife, Vi, are estimating the amount of life insurance to purchase on Vi's life. They first estimate the following expenses to cover immediate needs at death:

Final medical expenses:

$ 5,000

Funeral and burial expenses:


Estate settlement costs:


Debts (including mortgage):


Emergency fund:


College education fund:



$ 170,000

Example(s): They next estimate Mort's and their 15-year-old daughter's ongoing net income needs as follows (all figures here discounted to present value for simplification):

Readjustment period (2 years):

$ 47,000

Dependency period (1 year):


Blackout period (10 years):


Retirement period (15 years):




Example(s): Immediate needs + Present value of net income needs = $516,000

Example(s): Afterwards, they calculate other available assets that will be subtracted from this sum:

Bank accounts:

$ 20,000

Money market accounts:




Retirement assets:


Existing life insurance:




Example(s): The difference of $206,000 ($516,000 - $310,000) equals their life insurance needs.

Determining Expenses

With the family needs approach, you should carefully evaluate your family's particular expenses and avoid the temptation to follow general guidelines that don't take into account your unique circumstances. General guidelines may involve simpler calculations but may also cause you to omit some needs that involve substantial costs to your family. As a result, you run the risk of underestimating the amount of life insurance you need.

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Immediate Needs At Death

Your family will need readily available cash to pay off the deceased family member's medical expenses, funeral and burial expenses, estate settlement expenses, and debt liquidation expenses. In addition, it is advisable that your family establishes an emergency fund. This fund can help address unexpected expenses that might be particularly difficult to handle at a time of both financial and emotional stress. Furthermore, many planners recommend including the establishment of a college education fund among these immediate cash needs. The existence and size of this fund will depend on whether you have children, your philosophy about the family's role in funding college, and the type of college--public or private--that your child(ren) will likely attend.

Tip: Some planners would also include family readjustment period needs in the immediate needs category. The readjustment period, which typically covers the first one to two years after the family member's death, involves paying off that person's remaining obligations (auto leases and health club memberships, for instance), expenses in sorting out the family's finances, and possible bereavement counseling and related expenses. For the purposes of this discussion, the readjustment period is considered part of ongoing family needs.

Tip: Note that if you have a large estate and anticipate substantial cash expenses at death due to high estate taxes, among other things, and relatively low ongoing income needs thereafter, you might consider estate preservation and liquidity needs analysis as an alternative to the family needs approach. It looks exclusively at these immediate needs at death as the basis for determining the amount of life insurance to purchase.

Ongoing Family Needs (Net Income Needs)

After the immediate post-death expenses that require immediate cash, your family faces ongoing expenses for food, clothing, and shelter, among other things, that require continuous flow of income. Other anticipated sources of income (e.g., Social Security survivor benefits, wages, and pension benefits) will cover some of these expenses. Life insurance will be necessary to cover the difference. These net income needs will vary in amount and duration depending on your children's ages, the surviving spouse's capacity to earn income, your family's philosophy on how long it should support your children, and whether you have any children with special needs .

Generally, planners look at ongoing needs as falling within four periods. The initial readjustment period during the first year or two has its own particular expenses, from leftover obligations of the deceased to sorting out finances and possible family counseling.

Periods follow that involve child dependency (if your family has children), spouse income needs (the blackout period), and spouse retirement needs. Expenses such as college tuition and mortgage payments (if not already covered under immediate needs), as well as emergency funds, may fall into one or more of these periods.

An alternative to breaking the ongoing income needs into these periods is to look separately at the surviving spouse's total income needs and any children's total income needs after the insured's death, without separating them out into periods. You can estimate the spouse's monthly or annual income needs for a period up through his or her remaining life expectancy. You can estimate each child's remaining monthly or annual income needs until age 18 or some other point when you expect him or her to be independent. Although you aren't breaking down your analysis into the four periods, it still may be valuable to add in lump-sum expenses that may arise only during the readjustment period.

You have various options for estimating your family's net income needs during the four periods. One relatively simple option is to estimate that the survivors require around 70 percent of the income before the death. Another is to look carefully at current expenses for the other spouse and dependents and make estimates of future expenses on this basis.

With either option, you subtract out the expected sources of income from the estimated expenses to get the potential net income needs, if any, that life insurance must fulfill. Once you have added up your family's net income needs, you need to discount that future income stream to a present value lump sum. The present value figure you get, however, is only an estimate, as no one can predict future inflation rates and returns on various types of investments.

To get a present value for your family's ongoing income needs, you can utilize either a formula for calculating present value or the easier-to-use present value tables. If you use present value tables, they typically give the present value of one dollar at various rates of return for different numbers of years that you invest. You simply take the number of years and the percentage that apply to you, find the present value in the table, and multiply it by the total income needs or estimated expenses you calculated.

Example(s): Assume you estimated your family's net income needs through the surviving spouse's remaining life expectancy as $1 million for a 25-year period after the insured's death. You estimate that the inflation-adjusted rate of return (discount) rate for your investments would be 4 percent, a conservative estimate. You turn to the present value of $1 table and find a figure of 0.375 for a 25-year investment at 4 percent. You then multiply $1 million by 0.375 to come up with $375,000.

Some financial advisors recommend dispensing with calculating the present value of future income needs, since you are dealing only with estimates anyway. They argue that future investment returns and inflation rates roughly balance out and that you save having to do complicated calculations. Talk with your financial advisor about the relative merits of calculating the present value or dispensing with this calculation.

Tip: If the surviving spouse currently doesn't work but would need to become employed after the insured's death, be sure to account for professional childcare expenses in the child-dependency period.

Expected Available Assets

The final component of the calculation, after you've determined the present value of future net income needs, is to subtract expected available assets. The surviving spouse will be able to liquidate these assets after the insured's death to pay some, or conceivably all, of the immediate lump-sum expenses. As previously mentioned, these assets may include the following:

  • Bank accounts (checking accounts, savings accounts, and certificates of deposit, among others)
  • Savings bonds
  • Real estate
  • IRAs, 401(k)s, pension, profit-sharing plans, etc.
  • Group life insurance through an employer or association membership
  • Existing personal life insurance policies
  • Investment assets (e.g., mutual funds, stocks, or bonds)
  • Stamp collections, coin collections, antiques, artworks, or other valuable possessions, if appropriate to consider in your situation

Deciding on a Capital Retention or Capital Liquidation Approach

The process of estimating life insurance needs through the family needs approach has one further component. You need to decide whether to fund the family's ongoing income needs strictly through investment returns on the available assets and life insurance proceeds or through a combination of investment returns and liquidating the capital represented by the insurance proceeds.

Your choice of relying totally on investment returns ( the capital retention approach ) or relying partially on the capital ( the capital liquidation approach ) will affect your final estimate of the amount of life insurance your family needs. The capital liquidation approach is the more common choice, with the assumption that the life insurance principal will be used up over the surviving spouse's remaining life expectancy. If a family decides, however, that there is an overriding need to preserve the capital to pass along to the next generation, the capital retention approach may become the desirable strategy.

Example(s): You want to purchase a life insurance policy on your spouse's life and have estimated ongoing net income needs as $30,000 a year after your spouse's death. (This amount takes into account your expected reliance in part on other sources of income.) Using a capital retention approach, you would purchase a policy that would give lump-sum proceeds that, if invested, would produce $30,000 a year to you in income. You wouldn't touch any of the lump-sum insurance proceeds. Thus, you would be retaining all the capital represented by the proceeds. Using a capital liquidation approach, you would purchase a less expensive policy that would give a smaller lump sum at your spouse's death. You would invest that amount and satisfy your annual $30,000 needs partly from the income and partly from using the proceeds. The lump-sum proceeds would run out at the end of your life expectancy. You are, thus, liquidating the capital represented by the proceeds over time.


More Accurate Than Rules of Thumb and Some Other Approaches

By examining in detail your family's anticipated expenses during various periods after the insured's death, the family needs approach provides a realistic estimate of life insurance needs. Not only is this approach more accurate than the estimate offered by the rules of thumb , but it probably provides a clearer estimate than the income replacement approach and some of the other methods.


Requires More Involved Calculations Than Some Other Approaches

Unlike the rules of thumb and simpler approaches, the family needs approach requires a number of calculations, such as the estate preservation and liquidity needs approach. It also involves present value calculations, which are more sophisticated than your ordinary calculations.



This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of  The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.


The Retirement Group is not affiliated with nor endorsed by,,,,, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that focuses on transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.


The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at


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