The document compares the economic life value method and needs-analysis method for determining life insurance needs. The economic life value method aims to insure the full economic replacement value of the insured based on their expected future income, while needs-analysis only covers specific projected needs. Economic life value is considered more comprehensive because it accounts for both specific and unforeseen future needs, while needs-analysis relies on assumptions that may not prove accurate. The document advocates for the economic life value method as the optimal approach.

1. WHITE PAPER
INSURANCE MINUTE
Insights to more informed financial decisions
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2. ECONOMIC LIFE VALUE™ VERSUS NEEDS
NEEDS-
ANALYSIS IN DETERMINING THE PROPER
AMOUNT OF LIFE INSURANCE COVERAGE
Economic life value and needs-analysis are two methods for
determining life insurance needs. Both employ a needs
needs-based
planning approach. However, the economic life value approach is more
comprehensive insofar as it covers both specific and unforeseen
needs. Needs-analysis planning covers only specific needs and its
ly
The economic life accuracy relies completely on the assumptions it uses to calculate the
needs. The economic life value approach does not rely on assumptions
value method is a for accuracy, but rather seeks to insure for full economic replacement
refining of the classic value of the insured. Still, both systems are accepted practices used
insured.
within the life insurance industry.
approach invented
by Solomon Huebner The economic life value method is a refining of the classic approach
invented by Solomon Huebner called human life value. It is of
value
called human life historical importance to note that the American College and the CLU™
program were established using the human life value approach. Dr.
value Solomon Huebner, founder of the College, wrote a book entitled “The
Economics of Life Insurance” that had long been the “bible” of the life
insurance indu
industry. He explained that human life value was the most
accurate approach to writing life insurance on people’s lives because
of full economic replacement. Also, in 1928 the National Association
of Life Underwriters met in Los Angeles, California to determ the
determine
“best methods” for evaluating life insurance needs for individuals.
They, too, determined that the human life value approach was an
appropriate way to solve for the death benefit amount for consumers.
Interestingly, the life insurance industry began to slowly drift away
began
from this approach and adopt the needs-analysis method on a more
widespread basis. This is due to the fact that needs-analysis generates
needs
smaller life insurance recommendations than human life value and this
was viewed as “easier to sell” by many marketing and sales
to
departments.
In 1980, LEAP SYSTEMS, Inc. began to re educate the life insurance and
re-educate
financial services industry as to the origins of life insurance needs
determinations and the relative validity of Solomon Huebner’s human
© Copyright 2010. LEAP SYSTEMS, Inc. All rights reserved.
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3. life value method and its superiority to the needs analysis method.
However, further research and study concluded that a calculation
method to determine an individual’s human life value is empirically
impossible. With all of the social, emotional, and cognitive
For it is the implications that the quantification of a human life would necessarily
endeavor of all lines require, the ability for any one individual or formula to properly
undertake such a task seems presumptuous at best, if not practically
of insurance... to impossible. Therefore, it is with a more humble and scientific
assess the economic approach that LEAP SYSTEMS, Inc. has undertaken to qualify our
approach as Economic Life Value. For it is the endeavor of all lines of
value at hand and insurance, be it vehicular, property, health, or life, to assess the
economic value at hand and insure accordingly. So for the purposes of
insure accordingly determining the optimal amount of life insurance that one should own
at any given moment in time, it seems prudent that one identifies the
econo
economic value of the individual, both now and into the future,
instead of presuming to be able to quantify all that it means to be
“human.
human.”
The focus of the economic life value approach is to insure for full
economic replacement value of the insured rather than to determine
the “needs” of beneficiaries. The main reason that the economic life
The focus of the value approach is optimal is that it is impossible to know what the
needs of a family (beneficiaries) will actually be at any point in time.
(beneficiaries)
economic life value This is especially true when trying to guess at one’s needs 10, 20, or 30
approach is to insure years into the future. With the economic life value approach, a
primary wage earner knows that their family has been provided for as
wage-earner
for full economic best as possible and regardless of what unforeseen factors may arise
replacement value of in the future.
the insured rather Needs analysis’ primary shortcoming is that various assumptions can
neither be controlled nor can they be reliably counted upon at the
than to determine precise moment that a premature, unforeseen death was to occur.
the "needs" of Something as vague as a “guesstimate” of the income needs of
beneficiaries at any point in the future is a risky proposition when
beneficiaries
beneficiaries having to guess at various tax rates, inflation rates, income rates, time
periods, and the value of assets available at death.
What is certain is that economic life value planning avoids this problem
pro
by providing a recommended insurance amount equal to the insured’s
© Copyright 2010. LEAP SYSTEMS, Inc. All rights reserved.
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4. true economic worth. This economic worth can be calculated to a
degree of accuracy at any point in an individual’s life. Simply put,
there is no more precise method for measuring ins insurability. The
insured is provided with the maximum amount of life insurance that a
Simply put, there is life insurance company is willing to offer. This, by default, means that
an analysis of an individual’s current and future economic condition
no more precise has been taken into account and is actuarially determined to equate to
method for an amount of life insurance protection available today. Further to the
economic life value approach as being superior to needs analysis is
measuring that no other form of insurance protection is determined based on a
insurability beneficiary’s “need” at the time of a claim. Rather, insurance that is
beneficiary’s
owned for one’s car, home, liability, and other forms are all
determined based on the replacement value of the asset insured. Life
insurance should be no different.
How, then, is economic life value calculated? Most simply, one
multiplies the proposed insured’s remaining working years (i.e. to age
65) by the gross annual earned income. However, this formula can be
Insurance that is amended to include both inflationary increases in pay as well as the
ending value being discounted for the time value of money. There is
owned for one's car, no one, single formula that is more or less accurate so long as the
individual’s maximum capacity to earn income for the remainder of
home, liability, and their working life is considered in some generalized fashion. Most life
other forms are all insurance company underwriting departments will provide specific
insurance
details to their agents for use in determining an acceptable economic
determined based life value calculation. However, other factors such as occupation,
on the replacement health, heredity, etc., will ultimately determine the final amount and
the amount will vary slightly from company to company.
value of the asset
Clients of insurance professionals and other advisors should be able to
insured. help plan for the destiny of their heirs with the most complete
knowledge and information. By using the most compre
comprehensive
economic life value analysis tool in the industry, LEAP’s Family Security
Calculator™, clients are provided with the most comprehensive life
Calculator™,
insurance determination calculation available today.
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5. Contact Us
Contact us via e-mail at info@leapsystems.com
908.231.1511 | www.leapsystems.com
| 1170 US Highway 22, Ste 204 | Bridgewater, NJ | 08807
© Copyright 2010. LEAP SYSTEMS, Inc. All rights reserved.
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