Question

Which of the following methods is/are appropriate to evaluate a person's life insurance needs?

1. The human life approach to evaluate life insurance needs takes into consideration the income replacement needs of a person's survivors including income during the readjustment period, income to widow, and educational funds for dependents
2. The needs approach evaluates the estimated present value of income generated over a person's work-life expectancy that is needed and then adjusts for the expected consumption of the person and for taxes
A. 1 only
B. 2 only
C. 1 and 2
D. None of the above

Answer 1

Both the human life approach and the needs approach are valid methods for evaluating life insurance needs, considering income replacement and financial contributions to a dependant's well-being.

Step-by-step explanation:

When evaluating a person's life insurance needs, both the human life approach and the needs approach are appropriate methods. The human life approach focuses on the potential income the insured would have earned over their lifetime, which is necessary for their dependents' well-being, including income during the readjustment period, income to widow(er), and educational funds for children. On the other hand, the needs approach calculates the present value of future income, taking into account personal consumption and taxes, ensuring the person's financial contributions to the family are met if they pass away.

Considering all of these factors is crucial for a comprehensive evaluation of life insurance needs, which aim to adequately protect individuals and their families. These methods align with the understanding that insurance payments must cover claims, company costs, and profits over time, as well as consider the unique risks and conditions, such as different occupations and their associated risks.