Quick Answer
A needs analysis estimates the amount and duration of coverage by comparing financial obligations with resources available for those obligations. A suitable recommendation must also fit the client's budget, comfort with possible losses or changing values, existing coverage, intended benefit recipient, and need for guarantees or access to policy value.
How Do You Find the Coverage Gap?
Use a simple starting framework:
Coverage gap = stated obligations - available resources
- Obligations can include income replacement, debt, education, final expenses, and business commitments.
- Resources can include existing insurance and assets that are actually available for the same needs.
- Do not count one obligation or resource twice.
- No single formula replaces the client's facts.
Example: Assume the family needs four years of $45,000 income, $120,000 for debt, and $30,000 for education. Its available savings and existing insurance total $80,000 combined.
- Income need: 4 × $45,000 = $180,000.
- Total obligations: $180,000 + $120,000 + $30,000 = $330,000.
- Coverage gap: $330,000 - $80,000 = $250,000.
This simplified example ignores taxes and investment growth.
How Do Amount, Duration, and Cost Work Together?
| Decision | Question to ask | Common exam trap |
|---|---|---|
| Amount | How large is the remaining gap? | Using total obligations without subtracting available resources |
| Duration | How long will the need last? | Choosing a ten-year policy for a fifteen-year need |
| Affordability | Can the client keep making the required payments? | Choosing the largest benefit even though coverage may end because its funding conditions are not met |
- A temporary need may align with term coverage for the needed period.
- A lifelong need may support permanent coverage when the client can maintain it.
- Amount and duration are separate. The right amount for too few years still leaves a gap.
- Compare the total yearly cost and the size of each payment. Multiply a monthly quote by 12, a quarterly quote by four, or a semiannual quote by two.
Premium comparison:
- Monthly mode: $100 × 12 = $1,200 per year, with $100 due at a time.
- Semiannual mode: $570 × 2 = $1,140 per year, with $570 due at a time.
- Compare both the yearly total and each required payment with the client's limits.
Exam Tip: Gotchas
- The coverage amount and coverage period answer different questions. A policy can fill the dollar gap and still end too soon.
What Makes a Recommendation Suitable?
Start with the coverage need. Compare how long each policy lasts, required premiums, guarantees, and the features below. Do not begin with a product or illustrated return and search for a reason to sell it.
| Feature | What to compare |
|---|---|
| Cash value | Policy value available during life under the contract's terms. |
| Liquidity | Access to policy money when needed, after any charges or restrictions. |
| Policy loan | Borrows against available cash value, creating debt and interest. Unpaid debt can reduce death proceeds. |
| Withdrawal or partial surrender | Removes value under the policy's terms and can reduce cash value or benefits. |
| Underwriting | The insurer's review of whether to offer coverage and on what terms. |
| Conversion | The right to change eligible term coverage to eligible permanent coverage within the contract's limits. |
| Lapse risk | The risk that coverage ends because its payment or funding conditions are not met. |
- Review dependents, how long the need lasts, budget, risk tolerance, willingness to accept changing values or possible losses, existing coverage, intended benefit recipient, and available resources.
- Check whether employer coverage can continue or convert when employment changes.
- An affordable amount that stays in force may meet the need better than a larger design the client cannot maintain.
Exam Tip: Gotchas
- An illustration projects policy benefits and values using stated assumptions. It can show guaranteed and non-guaranteed values, but projections do not become guarantees. Attractive projected values do not make unaffordable premiums suitable.
How Do Business Needs Change the Analysis?
The policyowner holds the contract's rights. The insured is the person whose life is covered. The beneficiary receives payable benefits. The obligated buyer is the party that must complete the purchase required by the agreement.
- A key-person analysis can add projected lost revenue, replacement costs, and other nonoverlapping losses, then subtract reserves or other resources available for those losses.
- Life insurance can supply money for a buy-sell arrangement, but the written agreement creates the purchase obligation.
- Business debt can be a need when the business would still owe it after the insured person's death.
- Keep the policyowner, insured, beneficiary, obligated buyer, and purpose aligned.
What Should You Check on Exam Day?
- Which obligations and resources determine the coverage gap?
- How much coverage is needed, and for how long?
- Can the client afford both the yearly cost and each payment?
- Which values are guaranteed and which are projected?
- For a business case, who owns the policy, who is insured, who receives the proceeds, and what need is being funded?