Sample need analysis chart generated by software
There are two aspects to affordability discussion. The first aspect is related to whether there exists a need to have life insurance, the second aspect is how to balance the desired level of insurance protection with required level of premium payment.
The needs analysis, if done qualitatively, is roughly an assessment on whether the value to be protected, such as the family livelihood after one's death, requires a life insurance policy to reduce the risks of its destruction to a tolerable level. Once such needs are identified, a detailed quantitative analysis can usually be carried out with the help of computer software by a life insurance agent.
In general, the more the needs of insurance coverage, the more premium has to be paid. The identified needs may come in several severity levels. Some of the needs may be really indispensible, such as maintaining minimum living standard of the surviving family members. Some needs may be necessary but not indispensible, such as funding mortgage payments. Depending on one's value system, some needs may be just nice-to-have, such as funding for college education. If the financial resources available for paying premium are limited, chances are one has to sort out priorities among those identified needs and choose to only fulfill needs of higher priorities.
In addition, the needs of a typical family do change over time. As kids grow up, finish college education, and leave home to live their independent lives, the nature of the survival needs changes from covering major expense for kids into covering surviving spouse's living cost and potentially increasing health care costs.
Considering the changing needs of a typical family, the ever-increasing term life premium as one ages, and the potentially higher upfront whole life policy premium for policies with guaranteed death benefits and fixed premium level, the optimal affordable life insurance strategy is usually neither a whole life nor a term life polocy alone, but a proper combination of the two types of policies. The proper combination can be determined based upon available financial resources of the insured policyholder, the priority ranking of all identified needs, and the benefit cut-off point analysis balancing the desire to cover more against the constraint to pay within one's financial means.
When both types of insurances are sold, instead of being sold as two separate policies, the term life is usually sold as a "rider" to the whole life insurance. A "rider" is an insurance term meaning supplemental agreement attached to and made a part of the policy indicating the policy expansion by additional coverage, or a waiver of a coverage or condition. An example of such combination is a family maintenance policy.
A well-known author and management consultant Peter Drucker once said "Efficiency is doing things right, but effectiveness is doing the right thing". The purpose of this short article is not to cover every aspect of life insurance, but to hopefully provide prospective customers with some basic knowledge about insurance, preliminary ability of identifying the needs of having some type life insurance, as well as how an affordable insurance meeting high priority needs is like, before engaging the help of an agent, so that you as a consumer know what is the right thing to do to engage your life insurance agent effectively, you also know how to efficiently use your agent's professional skills in doing things right for you.
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