United States
Hong KongLife insurance needs analysis and suitability
Needs analysis works out how much coverage a client actually requires. Two approaches are tested: the needs approach, which adds up obligations to be met, and the human life value approach, which capitalizes future earnings. Suitability then asks whether the product recommended fits the client's circumstances.
Every other topic in the life half tells you what a product does. This one asks how much of it a person should buy, and it is the only place in the general portion where the exam behaves like a sales manager rather than an underwriter.
Two ways of arriving at a number
| Needs approach | Human life value approach | |
|---|---|---|
| The question it asks | What has to be paid for if this person dies? | What is this person's future earning capacity worth today? |
| Inputs | Debts, final expenses, income replacement, education, existing resources | Earnings, working years remaining, a discount rate |
| Result | A gap figure after existing assets | A capitalized value of lost income |
| Best suited to | Most families, most of the time | Comparing lost earning power, and some legal contexts |
| Weakness | Depends on assumptions about future needs | Ignores what the family actually requires |
The needs approach nets off what the family already has, which is why it usually produces a smaller number. That netting is the examinable step. A stem that carefully lists existing savings, a paid-off house or a group life benefit through work is not being descriptive; it is telling you to subtract.
What goes into a needs calculation
- Immediate cash needs: final expenses, medical bills, outstanding debts.
- A readjustment period while the family reorganizes.
- Ongoing income replacement for dependents.
- Specific future costs such as education.
- Less existing resources: savings, other coverage, survivor benefits.
Note the last line. Social Security survivor benefits count as an existing resource, which is one reason the outline puts Social Security benefits in this same section. The two topics are neighbors because they belong to the same calculation.
Personal needs and business needs
The outline splits needs analysis into personal insurance needs and business insurance needs, and gives the business side two named sub-items: key person and buy-sell. Those are the two situations where a business, rather than a family, loses money when someone dies, and they have their own page in this cluster.
The structure is worth noticing. Pearson is not asking you to do financial planning. It is asking you to recognize whose loss the policy is answering: a family's, or a firm's.
Suitability, which is the part with consequences
Suitability asks whether the product recommended fits the client's circumstances, objectives and risk tolerance. It has real regulatory weight for annuities in particular, where a long surrender period sold to someone who will need the money is the classic complaint.
A policy the client can pay for is not automatically suitable, and a policy that is suitable may still be unaffordable. The exam sometimes offers affordability as a distractor in a suitability question, and it is a distractor precisely because it sounds like diligence.
A client's needs analysis shows a requirement of a large sum. He has substantial group life coverage through his employer and savings set aside for his children's education. What should the analysis do with those?
- Ignore them, since they may not be available at death
- Subtract them, because they are existing resources meeting part of the need
- Add them, since they increase the estate
- Replace them, by recommending individual coverage for the same amounts
Where it sits
- Section
- IV, retirement and other insurance concepts, 8 questions
- Listed as
- E. Life insurance needs analysis and suitability
- Sub-items
- Personal needs, business needs (key person, buy-sell)
- Neighbors in the section
- Social Security benefits, tax treatment, group life
The opinion, and the concession
This is the section candidates find easiest and least interesting, and both of those are correct. There is no arithmetic to master and no vocabulary that changes meaning. What is worth doing is reading the two approaches once, understanding why they give different answers, and moving on. A section worth 8 questions across seven headings will not spend three of them here.
The concession: the exam's version of needs analysis is a simplification of what a competent adviser actually does, and we would rather say so than dress it up. It also does not test any Texas-specific suitability requirement, though Texas does regulate annuity sales practices. We hold the Insurance Code and can see those provisions; the general portion simply does not reach them.
Common questions
What is the difference between the needs approach and human life value?
The needs approach adds up what the family will have to pay for and subtracts what it already has, producing a gap. Human life value capitalizes the insured's future earnings into a present value. Needs analysis usually gives the smaller and more practical number.
Should existing group life coverage be subtracted?
Yes, under the needs approach it is an existing resource that meets part of the identified need. So are savings earmarked for a specific purpose and any survivor benefits. Failing to net off resources is the most common error in a needs analysis question.
What does suitability mean in a life insurance sale?
That the product recommended fits the client's circumstances, objectives and tolerance for risk. It is distinct from affordability, which is only about whether the premium can be paid. Suitability carries particular weight in annuity sales, where surrender periods can outlast the client's need for the money.
Does the exam ask you to calculate a needs figure?
The outline lists needs analysis conceptually, with personal and business sub-items, and no arithmetic requirements. Expect stems that describe a situation and ask which resources belong in the calculation or which approach is being used, rather than a computation with numbers to add up.