Finding a right life insurance cover involves a process where one needs to calculate the actual financial needs of their own as well as family members when time demands.

There are broadly two ways to calculate how much insurance one requires ---Human Life Value (HLV) and Need Based Analysis. The needs analysis is also called the family needs approach, the total needs approach, or the needs approach.

It is based on the assumption that the goal of life insurance is to cover the surviving family members’ immediate expenses post the insured family member’s death, along with their ongoing expenses into the future. It aims at the income and cash needs that must be met following an individual’s premature demise and compares those needs to resources already available.

This approach classifies the needs and decides their priorities. Individual and family needs to be assessed, along with the current and estimated ones. Need based approach estimates minimum economic support through life insured, whereas the HLV approach suggests maximum insurance. Need analysis takes into consideration the actual needs of the dependents and self, whereas HLV approach takes only cumulative earnings of the insured through his entire life.

Under this method, the family’s needs are divided into three main categories:

Need base approach works on two principles: How much will be needed at death to meet obligation? And how much future income is needed to sustain the household? Let us assume Naman has to understand the amount of insurance he will need to take care of his family consisting of his wife and a 3-year-old daughter. If he follows the need analysis approach, he is required to first estimate his family’s immediate needs for the remainder of his life as follows: