Needs Analysis and Policy Selection

Start with the need

For an individual, life insurance may replace income, repay a debt, fund education, support a dependent, or provide liquidity for final expenses.

• A health policy may protect against medical bills, replace income during disability, or pay a scheduled amount after a covered event.
• The reason for coverage determines what a useful benefit should do.

Estimate the need over the relevant time horizon.

• Ask who relies on the insured's income, which resources are already available, whether the need is temporary or lifelong, and how much premium the applicant can sustain.
• The answer should come from the applicant's circumstances, not a standard multiple or product illustration alone.
• For a stated needs calculation, add the obligations and subtract resources actually available for them. Example:
  • Total the needs: $300,000 for family support + $80,000 of debt = $380,000.
  • Total the available resources: $50,000 of savings + $100,000 of continuing life coverage = $150,000.
  • Subtract resources from needs: $380,000 − $150,000 = a $230,000 gap.
  • Do not subtract the same resource twice.
• Equal earnings do not imply equal insurance needs. Dependents, debts, existing resources, and how long support must continue can differ.

For example, a parent wants income protection while a child still depends on that income. The producer asks how long the need may last, what savings and workplace coverage already exist, and what premium the parent can afford. Those answers guide the amount and duration of coverage before a policy type is chosen.

How Do You Match the Product to the Need and Time Horizon?

Term insurance can fit a temporary obligation because it provides protection during a stated period.

• Level term keeps the death benefit level during the stated term, while decreasing term reduces the benefit over that period.

• Permanent life insurance can fit a lifelong need when the consumer can support the premium and understands the policy's guarantees, cash value, charges, and surrender terms.

  • Traditional whole life generally combines scheduled premiums, a guaranteed death benefit, and a guaranteed cash-value schedule. Those guarantees depend on meeting the policy's premium and other conditions.
  • Cash value is value built up inside a permanent life policy that may be accessible under its terms.
  • Surrender ends the policy's coverage and pays any available cash amount under its terms.
  • A surrender charge is a charge the insurer may deduct when coverage ends or value is withdrawn during the stated charge period.

• Group coverage may provide basic protection through an employer, but its continuation and conversion rights must be checked.

  • Continuation keeps eligible group coverage for an available period under its terms.
  • Conversion lets an eligible member obtain a separate individual policy under the conversion option's conditions. It is different from continuing the group plan.

• Count the uncovered years when coverage ends before the need. A 12-year policy leaves 6 years of an 18-year obligation without that policy’s protection.

• Permanent coverage still has funding conditions. Check required premiums and guarantees; the word “permanent” does not promise coverage after every missed payment.

An annuity may address accumulation or retirement income.

• It does not replace a life policy's death protection.
• Disability-income insurance replaces part of income under its definition of disability.
• Long-term-care insurance addresses qualifying care needs.
• These products solve different problems, even if all are sold by a life and health producer.

Compare before recommending

Compare the coverage amount, exclusions, waiting periods, premium pattern, renewal rights, policy guarantees, liquidity, and risk borne by the consumer.

• An exclusion is a service, loss, cause, or circumstance the policy does not cover.
• A waiting period is a stated delay before coverage or a particular benefit can begin. Check what event starts it.
• Renewal rights describe whether and on what terms coverage can continue at the end of its current period.
• In a cash-value policy, review guaranteed and non-guaranteed values separately.
• In a health plan, compare cost sharing and provider network as well as premium.
  • Cost sharing is the member's share of covered medical costs, such as the plan's deductible, copayments, and coinsurance.
  • A provider network is the set of health professionals and facilities contracted with the plan. Network status can affect access and cost.
• In an annuity, consider fees, surrender charges, investment risk, and payout options. Keep money needed for immediate emergencies accessible instead of assuming that every annuity withdrawal will be available without cost.
• Compare premiums on the same time basis. A $1,800 annual premium equals $150 per month for budgeting, though the insurer’s actual monthly payment option may cost more.
• Check whether the consumer can sustain future payments as well as the initial premium. A benefit amount alone does not establish affordability.

Exam Tip: Gotchas

• A low initial premium does not show the full cost or whether the coverage lasts long enough.

• For a flexible-premium policy, compare money paid in with insurance costs and charges taken from policy value. Example:
  • The owner adds $120 monthly.
  • Monthly deductions total $180 of insurance costs + a $15 charge = $195.
  • The monthly shortfall is $195 − $120 = $75, taken from existing value.
  • Assuming no earnings or other value changes, $3,600 of available value ÷ $75 covers 48 months of this shortfall.
  • Actual contract terms, guarantees, and future changes still matter.
• A nonguaranteed illustration shows assumptions, not a promise. Separate the guaranteed values from projected growth before comparing designs. A planned premium stop date based on projected growth can change if results are weaker. The owner may need to continue or resume payments.
• For an existing life policy eligible for illustrations, request a current in-force illustration when available under the applicable contract and illustration rules. It shows future benefits and values using the policy's current position, with guaranteed and nonguaranteed results kept separate. Review it with the contract's funding conditions; an old sales illustration or today's surrender quote does not answer the same question.

Exam Tip: Gotchas

• An illustration is not a guarantee unless the value is specifically identified as guaranteed.

For a business, identify the agreement or exposure the coverage will support.

• A key-person policy and a buy-sell funding policy can name different policyowners and beneficiaries.
• Confirm that the proposed design matches the business purpose and that the parties understand their rights.
• When a buy-sell agreement’s purchase obligation changes, compare the new obligation with available policy proceeds and other funds committed to the purchase. Changing the agreement does not automatically increase the policy benefit.

What Should You Check on Exam Day?

• What financial need, time horizon, and existing resources drive product selection?
• Do the contract guarantees, cost, and risk fit that need?