Which two methods are commonly used for calculating life insurance needs?

The capitalization of income approach and the capital retention approach are widely recognized methods for calculating life insurance needs.

The capitalization of income approach focuses on determining how much income a policyholder would need to replace in the event of death. This method evaluates the total income the individual generates and calculates a lump sum needed to provide that income through investment returns. Essentially, it ensures that beneficiaries have an income stream akin to what the insured provided while alive.

The capital retention approach, on the other hand, emphasizes preserving the capital needed to generate the necessary income for survivors. Rather than exhausting the principal amount, this method aims to maintain the corpus intact while drawing an income from the investment earnings it generates. This approach is particularly beneficial in long-term planning scenarios, ensuring financial security for dependents over time.

Together, these two methods offer a comprehensive framework for individuals and financial advisors to determine adequate insurance coverage aligned with both current and future financial needs.