Final answer:
Determining the needed amount of life insurance involves a financial needs analysis, assessing gaps, how insurance can address them, and deciding on the purchase amount to ensure adequate survivor protection, while accounting for company costs and profits.
Step-by-step explanation:
The method of determining the appropriate amount of life insurance coverage involves analyzing a client's financial needs, identifying any gaps or deficiencies in their current financial plan, assessing how life insurance can address these needs, and ultimately deciding on the amount of insurance to purchase. This process ensures that in the event of the insured's death, the financial protection provided to survivors is adequate. The calculation of the correct amount of life insurance typically takes into consideration the insured's current and future financial obligations, income, dependents' needs, and any existing assets or coverages. The goal is that over time, the insured's insurance premiums will cover the claims made, the costs of running the insurance company, and allow for company profits.
In order to reassure a bank about loan repayment, individuals may provide collateral, a good credit history, or guarantors to offset the problem of imperfect information. An insurance premium is the amount paid for an insurance policy, and in a large group, the average benefits paid out typically align with the average premiums collected, although not everyone will receive benefits equal to what they have individually paid. Lastly, an actuarially fair insurance policy is one in which the premium matches the expected payouts, while moral hazard represents the risk that one might change their behavior knowing that they are insured.