This lesson focuses on the following topics:
• ESTIMATING LIFE INSURANCE NEED
o PREMIUMS AS PERCENTAGE OF INCOME
-Family Needs Approach
-Income Replacement
-Estate Preservation and Liquidity Needs
• THE APPLICATION PROCESS

LIFE INSURANCE


Premiums as Percentage of Income:

Using the Premiums as Percentage of Income rule, a minimum of six percent of theinsured’s gross income (as the primary income earner) should be spent on life
insurance premiums. Add an additional one percent for each dependent. Once the
applicant determines the percentage of the income that should be spent on life
insurance premiums, the agent may advise purchasing as much life insurance as the
applicant can get for that premium amount.
There are other more comprehensive methods used to calculate life insurance need.
Overall, these methods are more detailed than rules of thumb and provide a more
complete view of insurance needs. These methods are:
• The Family Needs Approach
• Income Replacement
• Estate Preservation and Liquidity Needs

The Family Needs Approach requires the applicant to purchase enough life insurance
to allow his/her family to meet its various expenses in the event of the applicant’s death.
Under the family needs approach, the applicant divides his/her family's needs into two
main categories:
1. Immediate Needs at Death (Cash Needs)
2. Ongoing Needs (Net Income Needs)
Once the applicant determines the total amount of his/her family's needs, he/she may
purchase enough life insurance to cover that amount.

The Income Replacement calculation is based on the theory that the purpose of life
insurance is to replace the loss of the applicant’s income when he/she dies. Under this
approach, the amount of life insurance the applicant should purchase is based on the
value of the income that he/she can expect to earn during his/her lifetime, taking into
account such factors as inflation and anticipated salary increases.

The Estate Preservation And Liquidity Needs approach attempts to calculate the
amount of life insurance needed upon the applicant’s death for items such as taxes,
expenses, fees, and debts, while preserving the value of his/her estate. This method
takes into consideration the amount of life insurance needed to maintain the current
value of his/her estate for his/her family, while providing the cash needed to cover death
expenses and taxes.

THE APPLICATION PROCESS:

Introduction

First things first—to get insured, one needs to get an application from the insurance
company. The applicant then fills out the form, signs it, and returns it for consideration.
It is often required that the applicant be physically present in front of the agent while the
questions are being filled out on the application. The information provided in the
application form gives the underwriters of the insurance company a basis for
determining if they will issue a policy.

Parties involved in an Insurance Application:

There are three parties relevant to an insurance application, namely:

The Proposed Insured :

This is the person whose life is being insured by the
life insurance policy.

The Applicant :

This is the person applying to the insurance company for life
insurance and may or may not be the proposed insured.

The Policy Owner :

This is the person that usually pays the premiums and the
person who retains all rights to any values or options contained in the policy.